Different strategies to deal with the virus
Hello everyone, long time no see. I stopped my newsletter on Covid19 impact on farming as things started to evolve more slowly and as we were settling in for the long run. We can now see that contrary to what we hoped the situation is set to last for longer. Governments all along the world have tried to mitigate the crisis by restricting people’s liberties. We have seen several strategies appearing:
- A stop and go strategy with a low level of cases threshold and supposedly tight restrictions otherwise
- A stop and go strategy with a higher level of tolerance for cases
- A live with the virus strategy linked to tight restrictions (and global acceptance/respect) with no renewed lockdown
Up and down in terms of demand are likely to still be very much present in the future even after vaccine are gradually being pursued.
Grain Markets: Cereals, Maize and Soybeans - the mainstay of our alimentation (and part of our livestock feedmix) - (ADHB/FT)
I will begin with grain markets because they matter for the welsh cattle feed cost evolution. World prices on wheat, maize and barley have seen quite a hike in the past few months, mainly linked to worries about crops in the US, Latin America and Eastern Europe. This has been mostly due to weather condition triggering either poor emergence, reduced harvest (or harvesting difficulties). Prices have started to loosen in the last week due to rain finally coming up.
In the UK the straw harvest has been of moderate quality, there has been some pressure on its cost. Most farmers paying around or more than 100£/T. Overall pressure for livestock bedding has tightened over the past few years.
On 3 years; nominal US Dollar market prices for Corn-Maize (Blue), Soybeans orange and Wheat (Brown). Promising market prospects for arable farmers, but rising feedcost for livestock farmers. Financial Times. 11-20
A long run of Chinese purchases of US soybeans over the last couple months saw soybean prices reach the highest level since July 2016 last Monday. And the fears over a reduced crop next year in Brazil have been alleviated. Remember that the prices crashed hard at a 10 year low due to the coronavirus outbreak fears. (we must also remember that oilseed prices tend to evolve jointly with crude oil prices)
We are in for a somewhat higher feed price than it has been this year so far. This has favoured fattening and productivity/short liveweight gain focused that bode well with this year livestock market in the end.
Crude oil - brent prices evolution in nominal dollar $. Evolution over 3 years going for the heights. Financial Times. 11-20
In the cost region there has been a rebound in oil prices, it is likely that it will fluctuate down a little less at each coronavirus wave. This second wave of lockdown has indeed triggered a smaller reduction in crude oil price. Fuel and fertilizer cost will be up
A lamb market that held well during 2020 (Hybu Cig Cymru and ADHB)
Before delving into the market evolutions I think we need to remind ourselves that:
- The £ is down against the euro and the dollar. A long lasting trend since the EU exit referendum. It currently stands at 1£->1,1€ a low level. It favors exports and make imported goods dearer to UK consumers. The average yearly pound value has not changed dramatically during the last 3 years though.
- The sheep market demand has been growing in developing markets, particularly the Asia market. This has been boosted by the African Swine Fever triggering a shortage of pork meat and fuelled an increase in other meats, including lambs. This reduces pressure from imports from the Southern Hemisphere producers with quotas to the EEA (European Economic Area).
UK Pound Sterling/Euro FX Cross Rate (Blue) and UK Pound Sterling/US Dollar FX Cross Rate (Orange) evolution over 3 years. The £ is weak which means that the same EUR or USD price paid for an agricultural products will translate in an increased £ value. It is what we have witnessed on numerous agricultural products. The flipside is it increases imports costs most of all for heavy users. Financial Times 11-20
Despair, hangover, ecstasy
This year has been very good for the sheep market in general. Exceptional even considering the woes that the sheep and lamb market faced last year and with COVID. Let’s try to debunk what’s hiding behind this.
From Hybu Cymru newsletters, monthly nominal auction prices in Wales. 11-20
At first there was the black March and April months were the early lamb producers and fatteners ended up facing a market going back to 2019 numbers after a promising 2020 start. But rapidly the prices went over 2019 level and stayed at that level for the rest of the season. Even offering a very strong summer for farmers and a late drop in prices. International trade and processor were working at a reduced pace to swallow existing stocks and reduced demand (some disruptions also occurred in the supply chain).
The number of ewes is on the downslope in the UK as a whole with a lamb supply staying strong. The terrible prices of 2018, 2019 stymied any willingness to increase flocks all the more with Brexit over the horizon. But as prices are steady in 2020 and with a greater confidence in the future Ewe demand has been high (as have been price this year), the lower number of cull ewe and ram seem to indicate growing flocks (but could also be linked to backlog in flock renewal).
The exports from the UK have been down compared to 2019. The demand in continental Europe the main market for lamb export has been subdued as a result of Covid19, it is also said that there has been an increased demand from the UK market. The loss might be linked to the black March/April months rather than the rest of the year given the sustained prices and volumes then churned by the UK and Wales.
There has been also been a decrease in import quantity from Ireland and New-Zealand that caused an overall lower import pressure on the UK market. While UK domestic market demand for lamb has been relatively strong, more people buying it in retail and eating it in restaurants (fuelled by the eat out help out (EOHO) scheme combined with the staycation trend). The demand for cull ewes staid at a good level both for export and locally.
Note: The lambs quotas to the EU for Australia and New-Zealand where linked to the UK entry into the EEC in 1973. It will be interesting to know what happen to those in the EU after the exit of the UK from the EU market. Currently both Australia and NZ don’t tend to fully use their quota.
The Milk market in the UK has held correctly after a collective effort to control production in spring.
The Milk market has been holding surprisingly well over the year, all prices seem above the 27 ppl mark for the market. It seems that the temporary milk production reduction over the spring during the lockdown has been enough to maintain prices. Deliveries were down by 5% until the middle of June. There has also been a second drop in milk deliveries during the end of August, probably linked to the end of the staycations and a drop of demand. Since then the market has asked for increased deliveries.
What we witness right now is a high volume market but prices have kept quite low. There hasn’t been any push for prices up. Interestingly the prices on the market are quite low in continental Europe compared to the UK.
A comparison with EU milk prices
This year low prices have been nowhere near 2016 or 2008 prices for the milk sector. Nevertheless it has been tough and farmers had to adapt quite fast (and successfully their production).
So what happened for the catastrophe not to happen?
One guess is that there has been reduced dairy imports while exports stayed strong. This is what the data suggests until July. Despite the Covid crisis, prices of the main dairy commodities maintained themselves. The collective effort of milk production reduction did the trick. It still represented a problem for some farmers. This is a testimony to the growing dairy market with a demand able to maintain itself during a pandemic. All the major importer where present.
Spot Milk prices are the living proof that there is a sustained demand for milk exports right now (powder, cheese...) and that the Covid crisis was a temporary blast. Business Insider - 11/20
The Beef market: Prices of feed versus stagnating price for beef
The cattle market went up in 2020 since the end of England lockdown. Prices are 25p/kg of liveweight over last year (and 16p over the 5 year average). And this for both the stores and fat markets.
It seems that the demand has remained strong with prime cuts (and more expensive cuts) finding more buyers. It is likely that the EOHO scheme played it's part in it. But at the same time the cattle throughput has varied quite a bit down during lockdown, then went over the average and now in September, October is down again.
The breeding herd of suckler cows keeps going down according to Defra, and the other cattle types are getting younger. Young cattle have been the prime of the show for the past few months. Higher and faster turnover in the face of a positive market might be the response of farmers to the recent trends with a rather supportive market compared to the 2000's.
There has been a lot of nervousness facing 3 months high prices. Farmers have thus tried to make the most of those prices, selling and fattening animals at a quite young age.
A similar fashion for sheep farming has been witnessed (slight reduction in the lamb average weight indicating an earlier sell date, proof are the incredible amount of sheep that markets dealt in June/July).
The supportive market is now pushing up the number of beef calf while the breeding herd of suckler cows continue to go down (this might be accelerated by some policies that will be introduced by dairies not to kill male beef calves). This trend is witnessed on the ground with increased numbers of people rearing calves on the bucket to top up their numbers. A trend of higher beef crosses number might continue to impact the number of suckler cows.
British self-sufficiency is ramping up and it’s a good news
Imports of beef have been down since the beginning of 2020 as a continuing process since 2018, it even accelerated this year (Ireland, Poland...). With more UK beef being destined for the local market than export.
Finally there is one thing that worries me in the wake of this crisis, it’s that the UK is still relying heavily on producing commodities. Most high-end products are non-registered and non-protected meaning they could be vulnerable in case of a crisis or fraud.
Potatoes farming have diverse fortunes depending on their profiles:
Finally let’s talk about potatoes farmers: These are the ones for which prospects have not been improving much. Potatoes market are very specialized more than the milk market.
The chipping potatoes market has been gloomy in Europe as a whole. In the UK prices have been very close to the 100-130£/T mark which is a 100£ (or more) than what is usually expected. Retail sales have been good on most varieties which helps alleviate those problems.
We acknowledge that the potatoes market is a high volatility commodity but it is simply bewildering and showing us that even with the EOHO scheme there hasn’t been enough potatoes consumption. It’s a low elasticity market, the price of the product is unlikely to make people increase their consumption (either the price of fish & chips, of potatoes in supermarket… We expect it to be reasonably cheap and filling).
The 2020 planting area is a little down but not so much which shows how baffling the crisis has been for many farmers. It would be interesting to compare the prices paid to farmers by cooperative compared to the other types of markets. It would also be useful to know what have farmers done with their potatoes and how full are stores. When potatoes are frozen for making frozen chips they lose value but somewhat it’s better than ditching them.
The volumes on free markets have been very low all along the year. The 2020 crop has a difficult harvest due to the difficult harvesting conditions.
Worries about a no-deal Brexit - and a return on WTO trade
First there is a glimmer of hope for a Brexit deal with elements pressuring the UK government to accept more concessions (remember 66 millions people face 446 millions (that are partially divided for sure)). Including the election of Mr Biden (Irish descendent) and 2 prominent pro-brexit advisors leaving Downing street...
But the agricultural markets have held well and this has been driven by EU firms (including Arla, Glanbia, Dunbia...) that have lately been signing in more farmers into dairy productions. All contracts tend to have a Brexit loophole to safeguard the transformation industry but this mark of confidence is very interesting.
The main problem for UK farm trading would not be to import but to export under WTO EU tariffs that might rule trade between the UK and the EU. In that regard lamb is clear liability the biggest by far. On the world scene it would mean that UK export production would be head on head with New-Zealand, Australia and USA ones.
A couple words of advice:
- If the £ is down as a result of a no-deal it could partially mitigate the cost of tariffs for farmers but input prices mainly imported would also rise. This would favour frugal farming systems with a low consumption of inputs and autonomous. For example grass focused dairy producers with low fertiliser consumption.
- A need to retain EU standard for food production because the EU is a regulatory power (for example in Argentina they were trying to have EU certification for their agrumes in order to export them). These are the most comprehensive rules on food safety in the world you abide by them every world market is potentially open.
- If the £ is down and that inflation is strong under UK government public money splashes into the economy it could favour a price crunch for the UK land and housing market maybe bringing it down to the EU averages (without links to subsidies).
- On the flipside it will be a lot like fly or die for many farms that would see their subsidy payments gradually diminish in a more competitive market and require either some cost-cutting or to find new added-value rich productions.
Couple articles worth reading:
