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January 2013
Agflation to bite into farmers’ 2013 income by Hugh de Lacy
slashed global production of feed grains by around 30%.
Global agricultural commodity prices look set to escalate to record levels this year, and probably well into 2014, but the return of agflation is likely to cream off some of the benefits to New Zealand producers.
The causes of the 20072008 round of agflation were primarily the quickly rising cost of oil, and the diversion of vast quantities of arable production in developed countries to biofuel.
Agflation, the flow-on effect of inflated agricultural prices on other economic inputs, resulted in food riots and political instability in under-developed countries in 2007-2008 as sky-rocketing food prices dragged other costs up with them. Agricultural prices crashed in the second half of 2008 before beginning to climb again in 2009 to reach a new peak, higher than 2008 levels, in 2011. The 2007-2008 scenario is repeating itself this year, though greater stockpiles of food world-wide are expected to prevent a repeat of the political instability, allowing poorer countries to switch back from meat proteins to staple grains like rice and wheat, which are about 30% cheaper than they were at the 2008 peak. The new surge in prices is driven by the widespread drought in the United States, Russia and Brazil, all big foodproducing countries, in the Northern Hemisphere summer of last year, which have
“In general terms agflation’s benefitting us positively,” Andrew Burt, the chief economist for Beef and Lamb New Zealand’s Economic Service, told Canterbury Farming. “I hesitate saying that given what farmers might be seeing particularly in lamb prices at the moment, and last year being so remarkable in terms of the drop in returns. “We are involved in a market that is benefitting from agflation, but we’re not seeing the full benefit of the returns back to New Zealand because of the appreciation of the New Zealand dollar over other currencies,” Burt said. After threatening to top US85 cents earlier in the month, the Kiwi was by mid-January fluctuating just below US84c. The service forecasts it to remain at these levels throughout the year. Burt said farmers should be careful “not to assume that prices will continue to rise as rapidly as they have. “And from a purely New Zealand exporting perspective
they need to be careful about the relative strength of the New Zealand dollar eroding those higher market values.” Hiking production to take advantage of the combination of higher export prices and record low interest rates was something of a double-edged sword given that “sheep and cattle, or any animals, are costing about twice as much to buy as they did a few years ago.” The main beneficiaries here of rising global agricultural prices will be beef farmers, already enjoying overseas returns that are at record levels. With feed grains, particularly corn, in short supply, overseas feedlot finishers are at an added disadvantage cost-wise compared to New Zealand grass-feed producers. The same applies to dairying, with Fonterra chief executive Theo Speirings forecasting last month that prices in its GlobalDairyTrade auction, which have risen 17% since August, will continue to rise in the first half of this year. Fonterra has raised its forecast payout to its producers for 2012-2013 by 25% to between $5.90 and $6 per kilogram of milksolids. A further 1.1% rise in the auction price this month may add 25c to that forecast.
“On the lamb side, things are a bit different,” Beef and Lamb’s Burt said. “Prices got a bit elevated a couple of years ago but now we’ve seen a correction in the United Kingdom and Europe generally, but mostly in the UK and Ireland. “They had a very tough and wet winter last year, and that’s slowed down their growth rates and ability to finish lambs. “I can’t say what that will do to prices but their supply is delayed coming onto their markets. “That’s a short-term situation versus the longer-
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term broader one that, as grain and food prices increase, they end up spurring investment,” he said. Farmers needed to be aware of the downside potential for volatility, especially in the second half of this year. International bank Rabobank this month said that, despite this year’s historic low levels of production and high prices, global agricultural markets are expected to shift from a squeeze to a surplus, particularly for grains and oilseeds. This is likely to increase the danger of flow-on volatility in other agricultural commodities.