Tyranny of cost-price squeeze
Teagasc researchers predict that productivity growth will be the key driver of income in Irish agriculture.
Producing more with less is seen as the only way forward — because rising prices for farmers’ produce will always be matched by rising prices for the farm inputs they use.
For most of the last 50 years, input prices tracked output prices. It was only when Ireland joined the EEC in the early 1970s that faster growth in output prices for a while exceeded input price inflation — giving farmers a brief break from the tyranny of the cost-price squeeze.
It is mostly because of this squeeze that farmers have to depend on help from the EU’s Common Agricultural Policy, or from the Farm Bill in the US, or their counterparts in other countries.
Without such policies, it seems that farmers would be ground into the dust by the free market trends which leave them subject to a merciless squeeze.
It seems also that modern economies are powerless to combat such squeezes other than by getting taxpayers to subsidise farm incomes.
Economists term the ratio of agricultural output price to input price the “terms of trade” of agriculture.
In Irish agriculture from 1961 to 1992, those terms of trade declined by 5%.
Even though there were big increases in Irish farm produce prices, associated with accession to the EEC in the 1970s, the costs of production just rose and rose, with the deterioration in the terms of trade (from the farmer’s viewpoint) accelerating after the switch from market price support to direct income support that began with the MacSharry reforms of 1992.
Between 1992 and 2011, Irish agriculture’s terms of trade slumped by over 22% — with sellers of agricultural inputs such as energy, feed and fertiliser creaming off much of farmers’ extra earnings. This conjures visions of the people farmers buy from and sell to lining up to pick the EU direct income supports out of their pockets.
But the truth is more likely to lie in consolidation of the companies farmers deal with, plus fluctuations in energy costs, and inflation. As “upstream” seed and fertiliser companies consolidate, farmers are less able to “shop around” for lower input costs. Downstream prices can stabilise or decline due to several factors, including overproduction and consolidation. When consolidation downstream occurs as well, farmers have fewer places to sell crops and have to sell for what buyers were willing to pay. Farmers then become price-takers, unable to pass on increased costs to consumers.
This is not unique to Ireland, it is the experience of agriculture in most developed economies.
It came to a point in a crippling cost-price squeeze for US farmers at the end of the 1990s. While wheat prices were at 30-year lows, their combine harvesters were costing up to $300,000. As a result, US grain farms had to be at least 2,500 acres to be viable for full-time farmers.
However, the ethanol boom has shown that farmers can occasionally get the upper hand, with US crops growers recently enjoying their best years ever.
That is unlikely to last, due to farmers’ exposure to what economist call “near-perfect market competition”, leaving the average prices they are paid persistently equal to or sometimes even below average production costs.
According to Teagasc experts, only productivity growth, and adherence to environmental standards, will enable farmers get their noses in front.
They have worked out that Irish farmers did even worse from 1961 to 2011 than the bare terms of trade trend would indicate. They corrected the terms of trade to account for changing productivity in agriculture, and found that farmers lost ground at an annualised rate of just less than 1% — because of reduced market price support after the MacSharry and subsequent CAP reforms... and a slow down in farm productivity growth.
Their conclusion: farming is little different from any other sector of Irish business — in that growth in productivity will increasingly be the key determinant of the income trend.
The good news: it was the restrictive EU dairy quota system and coupled direct payments for drystock that reduced the incentive to improve productivity, in part at least.
And the ending of the EU dairy quota system in 2015 raises the prospect of growth in productivity.
Hopefully the Government will do all it can to boost productivity, because the Teagasc verdict is that productivity gains in Irish agriculture are crucial to achieve the national Food Harvest 2020 targets.
