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.
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