UK: Agricultural Bulletin - A Briefing For Farmers And Land Agents

Impending Storm Or Distant Rumble?
Last Updated: 23 June 2008
Article by Susan Shaw

In this issue, we look at how high grain prices have led to a food crisis in the developing world. But how will this affect UK farmers? We also provide an update on the fortunes of the UK dairy industry and discuss crop forecasts for the upcoming harvest.

THE GLOBAL FOOD CRISIS - A DISTANT RUMBLE?

In the face of a looming food crisis, we look at how shortages elsewhere might affect UK farmers, if at all.

The head of the International Monetary Fund cautions that rising food prices could lead to war, the president of the World Bank warns that hundreds of millions of people will be pushed into poverty, and Gordon Brown convenes a food summit. Seldom in recent years has food featured so prominently on the political agenda. But why are people only talking about a food crisis now when prices started rising last summer?

The reason is because grain prices didn't increase much during 2007 – unlike with wheat. Here in the UK, we tend to focus on wheat prices. Wheat is the largest crop for producers and, as consumers, bread and other wheat-based foods are the staples of our diets. So with wheat prices taking off in early summer 2007, the UK has had time to adjust to the market situation.

But, rice and maize are the main grains consumed around the world. And, since Christmas, grain prices have raced away. This is particularly true of rice, for which prices on world markets have doubled. In some local markets the increases have been even higher.

In 2005, UK spending on food was only 10% of gross income. So a small percentage increase in food prices will not cause much hardship for the vast majority of British consumers. However, if you are spending half or more of your income on food (as the majority of the developing world does), any increase, no matter how small, will have a serious impact.

So how do we deal with the impending crisis? Some countries have introduced emergency measures, such as banning rice exports. But this means prices go up even more in those countries that have to import a large proportion of their food. To compound the problem, the buying power of aid agencies decreases with price increases, but the queue of hungry people gets longer. So what does this mean for UK farmers? One answer might be: "Not much". Being somewhat heartless, the crisis is a long way from here. Higher prices should eventually stimulate greater output and politicians will move on to the next topic. But the UK isn't isolated from the global economy.

A variety of problems such as water shortages, small farm sizes and a lack of credit make it difficult for farmers in the developing world to increase production. Therefore, in the short term at least, the burden of feeding a growing world population will fall on agricultural sectors in the developed world. This may sound like a recipe for continued high grain prices – to the benefit of UK farmers – but there is no guarantee that lurid headlines will translate into strong markets.

Farmers in the developed world have already planted a greater area of crops this year. Also, those hit hardest by rising prices are unlikely to be the type of consumers who can pay high prices – they are effectively outside the global market unless governments and aid agencies intervene. Thus it is in the policy arena that the largest changes may occur.

Incentives for biofuels will be hard to explain politically when there is a world food shortage (even if 'fuel versus food' is a massive simplification of complex markets). Perhaps Europe will even weaken its stance on genetic modification if food production becomes an increasingly important policy goal.

So how does this affect British farmers? We're yet to see. But, at the very least, perhaps it is just good to be involved in an industry that matters again after years of being virtually ignored by policymakers.

DE-CAPPING THE CAP - AN UPDATE ON THE HEALTH CHECK

The EU Commission's latest proposal bins capping, replacing it with progressive modulation.

Marianne Fischer Boel, the agricultural commissioner, has always stated that the Common Agricultural Policy (Cap) Health Check is not a major policy reform but a way of gently improving current policy to better suit European agriculture. It aims to examine current policies and negotiate how the constituent parts might be improved for implementation in 2009.

Of the policies appearing on the negotiating table, the most important for the UK is dropping the idea to cap aid payments to large farmers. Instead, the Commission is now proposing to merge capping with a previous but contentious suggestion – the rise in the rate of compulsory European Union (EU) modulation – to form progressive modulation.

On this basis, compulsory EU modulation would rise by 2% a year between 2009 and 2012 to 13% (Figure 1). But on aid payments in excess of €100,000, €200,000 and €300,000, there would be additional modulation of 3%, 6% and 9% respectively.

Of course, this doesn't take into account the various additional rates of UK voluntary modulation. The Commission would certainly like to see the 'extra' percentages of UK modulation fall as the EU rates increase.

Although the UK Government came out strongly against capping, it may not be against this proposal. The deductions are somewhat less and may be considered small enough not to be too distorting. The proposals also suggest that more money will be available for rural development within the UK, which the Department for Environment, Food and Rural Affairs (Defra) might find attractive.

Fig 1: EU compulsory modulation rates

Single payment scheme income band (€)

2008 (current)

2009

2010

2011

2012

Below 5,000

0%

0%

0%

0%

0%

5,000 – 100,000

5%

7%

9%

11%

13%

100,000 – 200,000

5%

10%

12%

14%

16%

2000,000 – 300,000

5%

13%

15%

17%

19%

Above 300,000

5%

16%

18%

20%

22%

CRYING OVER SPILT MILK - A DISMAL OUTLOOK FOR THE UK DAIRY INDUSTRY

The dairy industry has been in the spotlight for a while now – and for good reason. Rising input costs, high prices and policy changes are squeezing farmers out of the market.

UK milk production for the 2007/08 year looks set to be over 700m litres (adjusted for butterfat) below quota. This is a record shortfall. It means production was some 5% below quota or, put another way, short by 18 days' worth of production.

The target for UK milk producers is disappearing even further out of sight. In order to engineer a soft landing when milk quotas are abolished in 2015, the EU is giving out extra quota. The idea behind this is that once enough quota is circulating and every member state has more than it needs, quotas will cease to have any value or meaning.

As part of this, EU farm ministers agreed to raise milk quotas by 2% from 1 April 2008. This will increase each producer's quota by 2%, in addition to the 0.5% due this year from the last Cap reform. Taking all of this into account, the UK's quota will be approximately 14.7bn litres. But, if this year's production is anything to go by, this will not really affect the UK, at least in the short term.

It is unlikely that this spring will see a flush of milk. The March figures put UK butterfat-adjusted production 80m litres under target. With a late spring, high feed costs, little forage (mostly of indifferent quality) and low stock levels, the chances of a delayed surge are small. This, in turn, is helping to keep milk prices firm.

Due to the shortage of raw materials, milk buyers have to maintain or increase prices to stop producers defecting to other processors. This is despite markets for most dairy commodities weakening over the past few months. However, the costs of production have increased tremendously, so current prices are probably the bare minimum required to stop a further wave of producer exits. Unfortunately, the bad news doesn't stop there. The next hurdle on the horizon is the forthcoming changes to the Nitrate Vulnerable Zone (NVZ) rules.

It seems almost certain that the new NVZ rules will introduce much more onerous restrictions for the spreading and storage of slurry. The impact? Many dairy farmers will be faced with big capital investments simply to keep producing. At this point, unless the price/cost equation looks a lot better than it does now, a further segment of the industry may well disappear.

HARVEST 2008 - PRODUCTION AND PRICE FORECASTS

Prices rose, so plantings have increased. But market movements and weather volatility increase the uncertainty of the crop size.

Higher prices have encouraged larger cereal plantings in the UK. Defra's December 2007 Surveys of Agriculture shows double-figure percentage increases on the previous year (Figure 2) for all winter cereal.

The situation in the UK is mirrored on a global scale. The International Grains Council expects 2008 wheat production to increase by 42m tonnes to 646m (7%). But usage will also increase, so stock levels will only rise by 16m tonnes. Total grain production (wheat and coarse grains) is forecast at 1,694m tonnes, up 32m on the 2007/08 record crop. This is just under a 2% increase (less than the wheat figure because global maize production is predicted to fall).

Price prospects for the 2008 harvest remain finely balanced. The market could move decisively in either direction, and prices are likely to be volatile as each new piece of market information comes forward. A further complication is the level of financial fund speculation in grain markets. This is exacerbating market movements and may be disguising some of the underlying market fundamentals. If supply exceeds demand in 2008 and stocks begin to rebuild, prices could weaken. But this will still require reasonable weather conditions to continue through to harvest. Just one weather-related croploss somewhere in the world would cause prices to firm.

As the crops in the northern hemisphere progress through spring and approach harvest, the size of the global crop will become more certain.

Fig 2: UK areas planted as at 1 December ('000 hectares) (Source: Defra)

Winter cereal

1997

2004

2005

2006

2007

% Change 06/07

Wheat

2,003

1,834

1,771

1850

2046

+10.6%

Barley

763

391

393

389

441

+13.5%

Oats

-

63

87

106

118

+11.3%

Oilseed rape*

444

534

510

596

605

+1.6%

Beans (England)

-

-

75

59

68

+15.6%

*The apparent increase in oilseed rape is misleading because at December 2006, a further 80,000 hectares were planted on set-aside, which is not reflected in the figures. Adjusting for this, the true change is a decrease of 10.5% in winter oilseed area, indicative of 2007's relatively poor yield and low prices at sowing time.

MIXED RECEPTION FOR NEW LEVY BOARD

The AHDB launched on 1 April 2008. Unfortunately, but as expected, the industry has not received the Board with open arms.

The new Agriculture and Horticulture Development Board (AHDB) launched on 1 April, replacing the five independent agricultural and horticultural levy boards. The idea behind the new structure is to get better value for levypayers' money, for example, by commissioning single research projects on topics that cut across a number of sectors. Administration costs should also decrease with one 'back-office' for the likes of IT, staffing and accounts. It might even result in 'synergies' by pooling promotional budgets for the benefit of British food as a whole. But, despite these good intentions, a number of issues have already clouded the reorganisation.

Many of the benefits are unlikely to be felt until all the new organisations move into the AHDB premises in Stoneleigh, which is set for 2009. Until then, staff at the various sector companies will remain in their existing offices. But the move itself is causing problems, as many experienced staff are unlikely to relocate. When the National Farmers Union (NFU) moved its headquarters to Stoneleigh in 2005, less than half of its staff made the switch. Some industry players also see the NFU itself as a problem: there is a feeling that the move to Stoneleigh might allow the AHDB to be too influenced by the NFU. This has been a particular concern of the livestock sector, which believes that the sector companies have to retain autonomy in order to reflect the wishes of the levypayers in that sector.

Furthermore, when the move does happen, the current disparate set of organisations will need to be welded into a coherent body. Some are sceptical as to whether a larger organisation will necessarily deliver the cost savings envisaged. But the levy organisations can contribute greatly to a flourishing agricultural industry. It has to be hoped that a few years down the line this reorganisation is actually seen as the catalyst that brought a dynamic new body into being.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Related Topics
 
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions