Economics 101 for farmers - Most farmers pay little heed to market prices

Economics 101 for farmers - Most farmers pay little heed to market prices
Kieran Coughlan: "Most farmers carry on their normal farming business as best they can, and take whatever price they are given; after all, prices remain largely outside of their control." Photo: iStock

What are the long term implications for farming arising from the Covid-19 pandemic?

Will beef prices remain flat indefinitely, will milk prices hold up, and are their opportunities for farmers to diversify?

Predicting the future is a guessing game, but if you can analyse the trends, and predict consumer behaviour, you’re a step ahead of the competition.

It may come as a shock to you, but the vast majority of farmers pay little heed to market prices. Most farmers carry on their normal farming business as best they can, and take whatever price they are given; after all, prices remain largely outside of their control.

But farmers should be aware that the collective supply of their product is what dictates the price they get.

Basic economics tells us that a collective reduction in supply on a global level will result in an increase in prices, for a constant level of demand.

So, for farmers, the answer to poor beef or dairy prices is to reduce production. This has to be done on a global level, or displacement occurs, with production shifting to economically more efficient regions.

Economic signals we are given from the market are sometimes misinterpreted, and often flatly ignored.

In fact, the economic signals we are given can sometimes lead us to do the opposite to what we should be doing. For instance, dairy farmers facing poor milk prices will often try to expand their milk production, making up for reduced margin per litre by increasing the litres produced.

This rush to recover profits by producing additional milk only compounds the price problem.

Thankfully, as a nation of (predominantly) low cost milk producers, we can play that game and win because, ultimately, other producers in different areas of the world cannot afford to expand milk production profitably.

The signals we have been getting from the beef industry over the past three or four years are clear and unambiguous. There is virtually no profit to be made from beef enterprises at the prices being paid, except by the very best farmers, on the very best land.

The average suckler to beef farmer made €30 per hectare excluding premia in 2018, with the average suckler to weanling farmer losing €62 per hectare. Calf to beef farmers fared somewhat better, at €142 profit per hectare excluding premia.

These figures are against a backdrop of average beef prices of €3.81 per kg for 2018, compared to current prices of only around €3.40 per kg plus bonuses for R3s.

As farmers, we trundle on from one year to the next, for most of us there is relatively minor change in the way we operate. But the prospects of cheap competition and subdued demand are a harsh reality that we must bear, given the upheaval in markets over the past few months.

Defining this reality will help us prepare for it.

Over the long-term, market returns will recover. Nothing fixes low prices better than low prices. In other words, low market returns will over time cause a drop in production, whether through attrition or changing enterprises. Farm economics is after all a cyclical affair.

Meanwhile, positive demand for animal proteins from milk and beef, due to African Swine Fever affecting the pig industry, has progressed into India. The pig population in India is estimated to be over 10 million, one of the top 10 in the world.

Closer to home, bird flu is affecting egg supply, which is another important animal protein source.

On the animal feed side, the fall in oil prices and in demand for fuel will naturally lead to a diversion of maize corn from ethanol production. Ethanol is frequently blended with fuel, as part of renewable and green credential commitments.

A by-product of ethanol production is distillers grains, a high protein cattle feed.

As ethanol production dries up, availability of distillers grains as a protein based feed option has evaporated.

Diversion of maize direct to feed production rather than for ethanol has led to a fall in US maize prices, from over $180 per ton in August 2019 to as low as $122 last week.

Soyabean meal prices spiked at the end of March, as demand for alternative proteins to distillers lifted. Prices had been trading around $320 as recently as February, and shot up to $370 before falling now to about $310.

These low grain prices are generally not good for Irish farmers, as cheap grain translates into low costs for US and South American feedlot type beef and dairy producers.

In the meantime, each of us must assess our own farm financial position, and determine what actions we need to take in the short and long term.

- Kieran Coughlan is a chartered tax advisor and accountant from Belgooly, Cork https://coughlanaccounting.com/

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