General News: COVID 19 is here to stay whether we want it or not, recent restriction in countries ranging from heavily vaccinated to mildly vaccinated have shown us that herd immunity was sadly not yet a thing. In other words, disruption to trade, exchange of goods and people are far from over (Le Monde FR, The Guardian UK).
Specialized transport press (LeMarin, FR) shows that the price of shipping and the delays at various pinch-point in the supply chain (like Felixstowe port) are far from over (COVID disruption to crewing – trade flows (demand fluctuating), Suez canal blockade…). We moved in less than 2 years from a buyer’s market to a seller’s market. Freight transport companies – particularly transcontinental maritime large ones– cashing in profits after years of hardness.
Macro-economically, the lengthy quantitative easing by central banks (20% USD 2020 Monetary mass inflation) and very generous western government support to part of the economy has helped fuel a strong recovery, customers changing the way they spend their earnings. Burst of consumption and investment enabled by those policies (and savings during the harshest pandemic’s months) have developed linked to some home-working or the willingness to catch-up time. The supply chains that had been much reduced over Covid (primary produce extraction…) struggled to cope with this fast fluctuating demand. This has translated in increased prices in front of reduced supplies (sometimes like on oil, the supply strain is relatively voluntary), leading to inflation rising to high levels (Consumer prices rise over 4-5% EU, US and UK), mostly driven by energy.
Those reasons explains most of the shift in consumption patterns and the strains that we are witnessing on supply chains. There is a redistribution of the wealth and margins over the coming months, actors controlling the key sectors of the supply chain will benefit from it. So far the food industry doesn’t fully benefit from it except for primary produce farmer selling on SPOT markets, but UK consumer prices on food have only risen marginally since then with numerous access level products remaining relatively stable. The Christmas frenzy and it’s expected supply problems might be the chosen time for retailers to increase their prices.
Inputs and Fertiliser:
CF Fertiliser plant (between Chester and Manchester), the main artificial fertilizer production plant for ammonia (40%) and CO2 (60%) in the UK has run into difficulties due to soaring gas prices and asked for government supportthreatening to cut its production. It is a US company subsidiary, and while it failed on a commitment of keeping the production going, it received a subsidy instead. The results of CF industries are not particularly worrying, but if it had stopped production or collapsed it could have stripped the plant from the necessary equipment. This company with its oligopoly (dominant position) has an immense power which clearly questions again the market imbalances in the supply chain. You cannot privatise the profit and subsidize the losses. While I understand the needs to keep the CO2 flowing there is clearly a case to rethink government market direct intervention for it to be fairer on the tax-payer.
The same thing is happening over and over again on different sides of the supply chains providing (or transporting) inputs, in my opinion it calls for a reduction in our dependence to imported inputs (like gas, oil or soybeans) to reduce our dependence to cartels (oil) and oligopolies. If we are doing free market let’s do it correctly and wind down oligopolies.
Inputs are rising after depressed prices in 2020 following drops in consumption and widespread fears, in the face of strong recovery in demand, supportive global market outlook, high monetary availability, we are witnessing 10-15% increases on cake prices (pre-pandemic) and 15-25% increases on energy (October-November 2021,AHDB and EU commission).
Nota: less so on oilseeds, soybeans.
Brexit: Brexit forever?
The situation on trade has been relegated in newsfeed but the tensions between the EU and the UK remain, particularly around the implementation of the Northern Ireland Protocol (and particularly with France). The EU reduced significantly its requirements for controls over the Irish sea border for goods destined to NI, it is also committing to introduce a simplified declaration system for supermarket loads (particularly diverse, therefore the most impacted by the trading rules). Supermarkets have played down the scale of the changes made for them in terms of impact, but full controls are not being implemented on the Irish sea, fear of problems over borders combined to reduced requirements has meant that GB-NI and Republic of Ireland-Continent ferry routes have risen steadily in terms ofloads while the Welsh crossings have lost some traffic.
The problems and fears over trade paperwork have eased up for some traders proof is the relative winding down of direct services to France from Ireland and the Calais crossing gaining an operator betting on the land bridge (Irish Ferries). Nevertheless trade remains slower and costlier and more difficult to access for smaller exporters than previously but this hasn’t impacted farmgate prices so far.
One of the direst Brexit consequence has been a shortage of qualified labour in the supply chain from delivery drivers to abattoir workers. Despite these disruptions (apart from the pig industry ones) have been very limited so far (A union representative was warning the Welsh Affair Committee that things could worsen significantly soon on other livestock). The unwilling acceptance by the Home office to allow in some labour from other countries does not offer an attractive framework in the light of workconditions for those jobs in the UK (LSE Blog Manning (2021)). Labour shortages had started on the back of that way earlier (e.g. Byrne, R. (2018)).This has led the industry to try to favour capital (and work productivity) over labour (further incentivized by the tax regime structure) to solve those issues over the last 20 years (including on farms e.g. Jago, J., and Woolford, M., (2002)). Rethinking the attractiveness of job’s in the industry will need to be tackled by triggering a discussion on tax, benefits… It has been done in other strategic industries like shipping.
On the trade deal this is the analysis I gave in a recent submission (Cf other blogpost):
The implications can be quite different depending on the nature of the free trade agreements (FTA) concluded with partners. In 2018, Dwyer stated that “the most likely changes in trading conditions would tend to disadvantage the competitive position of Welsh agriculture vis-à-vis its main currentmarkets and trading competitors (particularly in sheep and beef).” With several FTAs now secured, we have a clearer picture of the position for Welsh agriculture.
Trade with the main trade partner- the EU
Although agricultural and agri-food goods can be traded without quotasor import duties, cross-border trade now requires additional paperwork and withit associated costs, to ensure compliance with local market rules. Large and homogenous consignments are relatively easy to send; but this is not so for smaller, mixed consignments, therefore limiting market accessibility particularly for small exporters from the UK to the EU. On this basis we can anticipate that lowest-added-value commodity exports will have been less negatively affected than higher-added-value quality Welsh food products like specialist cheeses or high-end, processed meat and vegetable products.
If a negative change of context in EU agricultural markets arises,prices could be affected even more rapidly in the UK. The EU will maintain Common Agricultural Policy subsidies with the Basic Payment Scheme as an income safety net for EU farmers. This puts UK farmers at a competitive disadvantage: there is a risk that the EU could thereby seek to sell cheaper agricultural products to the UK as a way to maintain its own market balance, using the subsidy system to undercut UK domestic production.
Trade with competing blocs
If there is no UK import safety net[1] Welsh farming could beundercut in terms of price. Where differing regulatory environments exist,cheaper, imported goods are likely to be favoured over Welsh products in the domestic market. Competition will depend on the type, quality and quantity ofproducts and their prices. The recent UK FTAs with Australia and New Zealand pose such a risk; although these nations’ main export partner is currently China, a political or economic crisis in south Asia could see their principal export market shift to the UK, which would represent a significant pressure on domestic sheep producers, in particular. Additionally, these deals do not guarantee Welsh producers access to additional exports. A lack of significant differentiation of Welsh products, combined with the lower costs of overseas production, makes Welsh produce generally unattractive for Australian and New Zealand domestic markets. Regulatory compliance is also a key issue here; to avoid unacceptable competition, each partner should be held to the same standards, including sanitary and phytosanitary and animal welfare regulations.
[1] Safety net mechanismscould include; import quotas, import duties, Sanitary and PhytoSanitary rules(limiting certain products) or ‘mirror’ clauses (so, the products entering adomestic market have to mirror the production requirements for domesticproducers).
Nota: It is extremely likely that in the coming weeks French fisherman in a row over fishing licenses with the UK government will ramp-up their efforts to disrupt trade.
Weather :
The COP26 took place in Glasgow and interestingly we had one of our warmest autumn on record, and autumn rains remaining relatively concentrated and brutal. We sit in the trendline witnessed for climate change in Wales. Contrary to 2020 or 2019 there has been little challenges in terms of planting condition for winter crops and the grazing season has been relatively long and favourable in 2021, which also means that the growing season has been extended for protected landscapes under agreements, we might notice some side effects in terms of landscape evolution towards a less palatable and worse overall conditions(nettles, Molinia, rushes…). Fodder stores are full which is a positive evolution.
Nota: I will soon have a blog-post on Climate Change adaptation necessary on farms published in the Rural Geography Research Group
Impact on production types:
Expect many more months of volatility ahead of us, my current analysis is only valid within the current context framework. In the light of the context describded above farm have been impacted very differently, inputs price rise make some prices increase over psychological thresholds for example fertilizer. In the condition of rising prices and with reduced support for farms on the horizon, high added value production have more flexibility to deal with the evolution. I also expect many farms to try to lock-in inputs price and output prices while they still can to secure their production cost. It is a long-term focused strategy that could help farms to resist in the next few years.
Grain and Potatoes: The price increases are high and quite paralell for both inputs and outputs, there is little stability on those markets particularly exposed to swings in market conditions.
- The volatility of the market could lead to reduced fertilizer hungry crops production in the world with already strained resources in Wheat and main cereals that fuelled current price increases. Bread grade wheat or hard wheat supplies might therefore get even tighter on European markets.
- Depending on the later estimates of the USDA we can expect some swings up or down during the year, particularly up and at least until Southern Hemisphere 2022 harvest (
IDELE 2021 market analysis). We can expect that many arable farms might try to secure their prices to stabilize one side of their production.
- We can expect lesser reduction from those having a contracted or secured output for their product than for those without.
Dairy: Price increases under inputs inflation within contracts except on SPOT markets, milk to feed ration tend to be down. Prices available on AHDB website show an average of 30-31 ppl just over the 5 year (non-deflated) average which could lead to further production reduction in an already strained market (IDELE, 2021). We also note the huge differences of prices between suppliers depending on the product mix and their structure, Arla has announced a 36 ppl price for december (Farming UK). Cheese hasn't increased in price compared to butter and milk powder or liquid milk.
- We note that UK milk prices are still aligned to EU prices in terms of trend.
- The production is down in 2021 but it was a particularly good growing season leading to lower costs and relatively high solids delivery.
- The most impacted farms by the current context will be heavy inputs consumer (energy, fertilizer andcake) they also have to deal with the long-term impact of work shortages, it will incentivize further efficiencies implementation (automatisation, IT revolution).
- The comparative beneficiaries of this trend will be farms autonomous in terms of labour and in terms of inputs, despite this some might encounter some treasury challenges (linked to their smaller sizes).
- Price increases linked to SPOT market make it sustainable to maintain or increase inputs for retailer focused on exports.
- Price increases linked to the local retail could be underwhelming leading to a slight reduction in milk production and maybe pushing farms out of milk (smallest, verge of retirement) or looking for work productivity gains (all the more if access to credit remains easy).
- Organic milk prices are down over limited demand and increased supply (EU and UK markets) this combined to increased inputs prices (that are already higher for organic farms) will render those more dependent on the subsidy payment.
Beef and Sheep: Price increases are over or equal to inputs cost inflation for most of the industry but despite this prices remain around what they were before collapsing 20 years ago in real terms. Below you will find cattle and lamb prices from the AHDB showing sizeable price increases, but as I repeatedly highlighted the long-term trend remains less rosy.
Given the relatively input savvy nature of Welsh beef and lamb production and the increase in prices for lamb/cattle prices over 2020-2021 the inputs price rise have been more than compensated. The demand is sustained, exports to EU on lamb remain relatively good in the light of relative supply shortage on EU market with "only" a 8% drop of exports to France versus 2020. The UK Beef production has partially replaced domestic Irish beef imports while the UK lamb production has also replaced some imports from New-Zealand and Australia.
- But the Beef and Sheep farms remain relatively fragile in terms of economics and as I already showcased before the increase in farmgate prices have only compensated what has been lost in the past.
- Despite this positive context there are dispersal sales happening regularly and the flock/herd is declining slightly, people are leaving the industry further reducing the breeding stock and the calves/lamb crops. It will have consequences down the line further upping prices. There is very little stock available on the market to quench the demand.
- Abattoir issues could lead to beef and sheep fall in prices in the next month.
Other livestock:
Pig prices have been down over the down on the back of the combined down market cycle and problems in abattoir (oversupply vs stable demand following wholescale production increases to answer the upcycle in relation with African Swine Fever market impact - China, Germany...). This might reduce temporarily the growth of the pig sector in mid-wales and the UK but will not change it's long-term development. Despite this their situation is particularly difficult to withstand with inputs price rise, particularly feed and energy on which they are highly dependent.
On the flipside egg and poultry production remain a stable and sure bet even in the light of the inputs price rise. Many producers have cost of production aligned contracts that can help them deal with the context.
Future context:
To understand future evolution the important thing is to look at relative deflated price-evolution for both inputs and outputs to compare the evolution of added value on the different productions. Those with lesser margins are more at risk at the moment of encountering issues.
In the light of recent trade deals and Brexit Agreement(s), of the policy context I exemplified the risk of food imports dumping UK products in case of crisis on agricultural markets (linked to a geopoliticalcrisis…). It could have a huge impact for Welsh family farms, the Welsh culture and the Welsh language.
To alleviate the rise of inputs cost, some farm systems adaptation will be made, if we believe previous trends it will either go towards a greater self-sufficiency with relatively similar production (if nofinancial/income pressure), an output differentiation (market channels…), diversification or increased work productivity and size to whether the new challenging context.
Land markets have been pressured in 2020 (smallest offer in decades according to Savills vs multiplicity of demand) and land prices have kept increasing, relying on more land to maintain or increase output will remain relatively costly (rent/buy) therefore limiting land based mitigation measure and still requiring high added value out of the land.
The inflation is starting to scare central banks who start to think about reducing quantitative easing which in turns could lead to reduction in FIAT’s markets liquidities possibly leading to a new phase of the COVID world. Possibly with a change of access to lending. It might become harder to obtain a loan (conditions, interest rates...) which is very important for the transmission of farms (out of the family). Lending restriction could prove problematic for the Welsh family farms. This would restrict heavily the farming system type and structures possible as described in the Call for evidence to the Welsh Affair Committee.
Théo Lenormand
November 2021
