2013 Market Snippets

    2013 Market Snippets

    “Prediction is very difficult, especially about the future” - Neils Bohr.

    Two reports in the past month suggested that food supplies in the medium term may not be as tight as many had forecast.  A report by the Institute of Mechanical Engineers suggested that waste and not production was the problem and this could be reduced. 

    The second report by the USA Rockefeller University suggested that an area twice the size of France would come out of production in the next 50 years.  This conclusion was based on analysis of the slowing rate of the increase in consumption and slowing rate of population growth relative to production increase.  In fact, the areas of forest in USA, India and China have already increased at the expense of arable land.

    Arable crops
    In general, crop forecasts early in the production year are based on trend yields and these are an important component of the forward price.  In addition, forward prices tend to move in parallel with current prices.  So, forward prices tend to be high when current prices are also high.

    At the end of 2012, the wheat price post 2013 harvest was higher than justified by the data and, although it has fallen now, it is still higher than might be expected with a ’normal’ global harvest. Our analysis shows that neither the USDA winter wheat crop progress report (last for 2012 was produced at the end of November) nor the current US drought situation would necessarily result in significantly lower production (both show an exceptionally poor situation for the major global grain exporter).

    There is no statistical relationship between the crop progress report in the autumn and final yield.  In addition, several of the most badly affected States also grow maize and if the wheat was replanted with maize the significantly higher yield would have made even higher grain production.  If there was normal rainfall from January to March soil capacity would be achieved and there would be no reason why water should restrict yield.  In early winter there was about a 70% chance of a £15-£20/t fall in price and a 5% chance of an £80/t rise.  However, the US drought is not materially better now and the chances of a price fall are reducing while the chances of a price rise are increasing.  By the end of March they might have reversed.

    The likelihood of the UK again being a net importer of wheat in the  next harvest year (2013/14) is high.  But the impact on price is highly dependent on location.  Liverpool will continue to import and East Anglia export.  In the Midlands and South West the impact on price may be more significant.

    Dairy
    If there are 150,000 tonnes of yoghurt and 115,000 tonnes of ice cream imported each year with little exported in return, as Owen Paterson claims, UK dairy producers and processors have a lot to go at.  Presumably those wishing to increase supply and thereby replace the imports  would be encouraged by the large retailers.

    There is criticism that modulation has reduced payments compared with their other European competitors leaving UK dairy farmers at a disadvantage and less able to produce at a low price.  This is true but the real damage is the transfer of cash to their farming brethren.  The basic subsidy awarded to EU dairy farmers was per litre of quota so there is only an indirect relationship with area.  However, most dairy farmers will have found that subsidy has moved out of the business, to other farmers during the transition from historic to regional system. Winners are extensive livestock producers, vegetable producers and owners of horses.

    While it is a decoupled payment and therefore, it is argued, should have no impact on production, this is a naive view.  The relationship between subsidy and the cost of land occupation is inevitably strong and even stronger on a regional system.  The subsidy is reflected in the rent paid potentially leaving the producer with little benefit.  However, for an owner occupied business, the subsidy may make a poor return from milking survivable – the higher the subsidy the easier it is to stay in production.  It does not help English producers that the adjacent countries in the British Isles have left their dairy producers with a higher subsidy.  Other EU countries have actively diverted payment from the arable sector to the dairy sector as well.

     
     

    Key contacts

    Andrew Wraith

    Andrew Wraith

    Director
    Food & Farming

    Savills Lincoln

    +44 (0) 1522 508 973

    +44 (0) 1522 508 973

     

    Steve Hollis

    Steve Hollis

    Director
    Food & Farming

    Savills Salisbury

    +44 (0) 1722 426 853

    +44 (0) 1722 426 853

     

    Ashley Lilley

    Ashley Lilley

    Director
    Food & Farming

    Savills Cheltenham

    +44 (0) 1242 548 012

    +44 (0) 1242 548 012

     

    Giles Hanglin

    Giles Hanglin

    Director
    Rural Research

    Savills Margaret Street

    +44 (0) 207 016 3786

    +44 (0) 207 016 3786