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05 October 2017

Agri Market Review and Outlook

Posted By: AIB Business
agri-review-245

2017 has been a much more buoyant year for Irish farming and most sectors have experienced a welcome margin uplift. The strong weather pattern in the first half of the year resulted in strong grass growth and livestock performance, and supported good crop performance in many parts of the country. Input prices are in general down on last year while output prices have recovered across most sectors, with some faring better than others. Combined, increased incomes is likely on many farms in 2017.

Dairy

The combination of supply corrections in the main dairy exporting regions and firmer demand for dairy products, in particular butter and cheese, has resulted in an upturn in dairy commodity prices and consequently milk price in 2017. The FAO Dairy Price index for August 2017 was up 1.4% from July and over 42% from August 2016. 

On the supply side, while milk production in the main exporting regions remained stable in 2016, there were regional variations. EU milk production increased marginally, USA’s output grew by almost 2% while in both New Zealand and South America supply reduced. This supported the strengthening of EU exports. The combination of improved demand and tight stocks supported price increases for butter and cheese in particular. The gap between protein and fat prices continues to widen as butter prices continue to strengthen while Skim Milk Powder continues to lose value under the weight of EU intervention stocks. Steady demand for butter in the EU and USA is attributed to consumer perception that it is now a safer alternative to vegetable oil substitutes such as margarine. According to FAO, growth in butter trade increased by almost 2%. EU butter exports have almost doubled since 2013 fuelled by strong growth in China, US, Saudi Arabia and Egypt. In the short-term, butter prices are likely to remain at current high levels, however, it is likely that with increased supply, prices will adjust downwards from current historic levels.

Cheese prices are reported to be at the highest level in four years and as a result processors, globally, are pushing greater volumes of milk into cheese, further tightening the butter market. Based on current average spot EU commodity prices at the end of August and allowing 5c/litre for processing costs, butter and SMP would deliver a return of 39 c/litre while cheddar and whey would deliver 35 c/litre. However, farm gate prices are not based on spot prices but rather on a combination of product mix and sales contracts.

Based on current prices and production trends, we forecast 2017 annual average Irish base milk price at 33.5 c/litre - 34 c/litre (Incl VAT). The combination of increased milk prices, weather and reduced input prices, in particular fertiliser, will support strong positive dairy farmer margins in 2017.

The current strong market returns do however also favour a recovery in milk production, particularly in New Zealand which the EU Commission forecasts could increase by 2-3%. US production is also forecast to increase by 2%. Demand looks set to remain firm over the months ahead particularly from Asia but increased demand is also seen from the Russian Federation and Mexico among others.

Cereals

Global cereal production is forecast to remain high for 2017, albeit not as high as the 2016 record. The International Grains Council forecast total wheat and coarse grains production of 2,038 million tonnes. Combined with existing stock levels, global markets are expecting an ample harvest with price expectations currently (28th August) similar to last year’s harvest prices.

The EU is forecasting a lower cereal harvest due to the combination of reduced sown areas and extreme weather events across the continent. The USDA has sharply increased its forecast of global wheat supplies in 2017/2018 due to increased expectations of output from the Black Sea region based on higher winter wheat yields. The impact is an expected increase in wheat stocks, above last season’s record level. However, US and Canadian wheat harvests are projected lower which will impact on the global market with reduced exports from this region. There are some concerns about tightening supplies of premium milling grade wheat. Overall, the USDA predicts global wheat stocks at end 2017/2018 at 6 million tonnes above last season’s record levels. It now seems unlikely, as some had predicted, that 2017 would see the start of a contraction in global grain stocks.

The unfortunate wet weather conditions in Ireland from mid-August into September are likely to have some impact on the harvest of spring crops. There are signs of break down in crops, discolouration and some deterioration of bushel quality. Overall, it is likely that late season weather conditions will once again impact on yields. Straw prices remain strong, in the region of €2 - €3 higher than last year. Overall it is likely that tillage margins for 2017 will remain broadly similar to last year, at low levels.

Beef

With 2016 beef prices down over 5% on the previous year, 2017 opened with concerns over increased supplies and fluctuating Euro Sterling exchange rates. However, supported by a strong live export trade, which is up 50,000 head to 153,000 head year to date (end-August), and strengthened EU beef prices, 2017 has been a relatively good year for the beef sector. Across the EU, growth in production has stabilised and when combined with a continued increase in consumption (forecast at +0.6% 2017) and increased exports has supported EU prices to date.

Irish Prices remained relatively stable through the first quarter of 2017 at c.€3.93/kg, peaking at €4.30/kg mid-June. Irish prices year to date (end-August) are 110% of the EU price and current prices are at a similar level. Euro Sterling exchange rate fluctuations in recent weeks are exerting some downward pressure on price which have been further impacted by recovery in supplies. When combined with stable input costs (assuming normal weather conditions continue) incomes on beef farms in 2017 should be above 2016 levels with suckler producers benefiting from a strong mart trade for quality stock.

Pigs

A further 2% decline in the EU sow herd in 2016 resulted in reduced pigmeat production in 2017 which has supported a strong recovery in pig prices. Pig price has been on a generally upward trend through much of 2017, helping producers rebuild cash reserves after a number of challenging years.

Aggregate prices year-to-date (end-August) are running over 15% above 2016 levels, which when combined with relatively favourable feed prices, is yielding strong margins over feed, particularly among those towards the top end of the efficiency scale.

The growth in EU pigmeat exports continued in Q1, driven strongly by Chinese demand. However, exports declined in Q2 due to the impact of prices on the competitiveness of EU product, a reduction in Chinese demand and a temporary suspension of licences by China of two significant German processors.

Notwithstanding some slippage in Irish prices in recent weeks, the outlook for the remainder of the year is broadly positive. While the soundings from global grain markets will not be welcomed by tillage farmers, pig farmers will certainly appreciate the feed price outlook.

Sheep

Despite sheep prices being currently (end-August) marginally above 2016 levels (+4.6% at c.€5/kg), aggregate sheep price end-August is running 2.4% below 2016 levels as a consequence of a more challenging opening quarter. Positive grass growth and thrive is however supporting improved finishing dates of mid-season lamb, with increases in throughput reported in the main export plants to end-August (+10%; +140,274 head). Demand for smaller store lambs has also been particularly strong among grass buyers in recent weeks, in part a reflection of beef price, as mixed enterprises keep greater numbers of sheep at the expense of cattle numbers to safeguard margins. Given reduced input expenditure and stable prices, incomes on sheep farms are likely to be at least comparable to 2016 levels.

Outlook

Overall, the outlook to year end remains relatively positive. Assuming positive weather conditions, lower input prices (feed, fertiliser and energy) will help reduce input expenditure on many farms, which when combined with increased output prices for many sectors, incomes on many farms will be above previous years. The  impact at  individual farm  level will as always be heavily influenced by underlying levels of competitiveness and on-farm efficiency.    

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Please be aware that all of the views expressed in this Blog are purely the personal views of the authors and commentators (including those working for AIB as members of the AIB website team or in any other capacity) and are based on their personal experiences and knowledge at the time of writing.

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