Rural Economy Research Centre
Situation and Outlook Conference
Inputs marketInputs market
Trevor Donnellan, Rural Economy Research Centre (RERC)Teagasc, Athenry, Co. Galway
Tullamore, December 9th 2008
Rural Economy Research Centre
Situation and Outlook Conference
Overview
Some background A quick word on interpreting price changes Look at price and quantity story in 2007/2008
Feed Energy markets Fertiliser Electricity Fuel Labour
Prospects for 2009 Summary
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Two types of price changes
How much have prices changed in 2008 ?
Type 1: Annual price changes
the changes in average annual prices year on year
Type 2: Changes in prices over the course of a year
i.e. changes in price from January to December
The difference may seem obvious (and it is!)
But quoted prices changes are often of the second type
Can be misleading if you want to analyse annual performance
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Lies, Damn lies…..
0
20
40
60
80
100
120
Jan-0
7Feb M
ar AprM
ayJu
ne July
AugSep
tOct
Nov Dec
Jan-0
8Feb M
ar AprM
ayJu
ne July
AugSep
tOct
Nov Dec
pri
ce
Price change 2008/2007 = 0%
Price change Jan 2008 to Dec 2008 = 66%
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Dairy and Beef Feed Usage
0
100
200
300
400
500
600
700
800
900
1000
1990 1993 1996 1999 2002 2005 2008
da
iry
fe
ed
(k
g/c
ow
)
0
50
100
150
200
250
300
350
be
ef
fee
d (
kg
/co
w)
Dairy Beef
Source: FAPRI-Ireland
2008 feed purchases:
• Dairy - up about 6 % on 2007
• Beef – up about 5% on 2007
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Feed Prices: 2006 to present
200
220
240
260
280
300
Jan
-06
Ap
r-06
Jul-
06
Oct
-06
Jan
-07
Ap
r-07
Jul-
07
Oct
-07
Jan
-08
Ap
r-08
Jul-
08
euro
per
to
nn
e
Source: CSO
Average prices per tonne• in 2007 - €246• in 2008 - €285
Approx 15% price rise (2008 v 2007)
€ 210
€ 290
Rural Economy Research Centre
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Feed prices 2008
Factors now pushing feed prices downward Increased planting rates improved harvests weaker demand growth
High level of cereal prices in 2007 locks in high feed prices in 2008
Cereal prices drop will take time to work itself through to the feed market
Feed bill for 2008 will be at record levels
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Weekly Euro US dollar exchange rate 2007 and 2008
1.00
1.10
1.20
1.30
1.40
1.50
1.60
1.70
Jan
-07
Feb
Mar
Ap
r
May
Jun
e
July
Au
g
Sep
t
Oct
No
v
Dec
Jan
-08
Feb
Mar
Ap
r
May
Jun
e
July
Au
g
Sep
t
Oct
No
v
do
llar
s p
er e
uro
Source: St Louis Fed
• Strong appreciation in late 2007 through to July 2008
• Sharp decline in recent months
Rural Economy Research Centre
Situation and Outlook Conference
Brent Crude price 2007 and 20080
50
10
01
50
Ja
n-0
7
Fe
bM
ar
Ap
rM
ay
Ju
ne
Ju
lyA
ug
Se
pt
Oc
tN
ov
De
c
Ja
n-0
8
Fe
bM
ar
Ap
rM
ay
Ju
ne
Ju
lyA
ug
Se
pt
Oc
tN
ov
cu
rre
nc
y p
er
ba
rre
ll
Euro Price Dollar Price
Source: St Louis Fed
2007: $72
€52
2008: $106
€70• Annual dollar increase: 46%• Annual euro increase: 33%
• Fuel costs in Ireland up 25 %
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Fertiliser 2008
Pasture and forage costs Major item: about 18 % of total production costs (dairy and beef)
50:50 Contractor costs and Fertiliser purchases
Contractor Costs: Up 20% Rising fuel and plastics prices
Fertiliser prices: Strong upward trend (more in a moment) Strong fertiliser demand
Increased energy prices, in particular the price of natural gas
Changes in the fertiliser export tax in China
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Fertiliser Manufacters’ Prices
0
100
200
300
400
500
600
Ja
n-0
7
Fe
bM
ar
Ap
rM
ay
Ju
ne
Ju
lyA
ug
Se
pt
Oc
tN
ov
De
c
Ja
n-0
8
Fe
bM
ar
Ap
rM
ay
Ju
ne
Ju
lyA
ug
Se
pt
Oc
tN
ov
De
c
euro
per
to
nn
e
Urea CANSource: Yara
• Brazil, India and Thailand: Urea demand stronger in 2008
• China: cut in export tax from Dec 2008 to end of 2009
Urea up 58%
CAN up 77%2007:
Urea €224
CAN €178
2008:
Urea €353
CAN €315
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Electricity and fuel 2007 and 2008
Demand for electricity and fuel tends to be relatively inelastic usage in 2008 will be on a par with the 2007 level
Irish Electricity prices regulated (change infrequently) price rose 17.5 % in August 2008
But average 2008 electricity price same as 2007 level Electricity prices higher in early 2007 than in early 2008
Fuel prices up 20% in 2008 on the 2007 level Overall expenditure on energy and fuel
up 13 % on dairy farms in 2008 up 20 % on beef farms in 2008
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Labour & Other costs in 2007 and 2008
Quantity of labour and other costs is relatively price
inelastic
Volume likely to change little year on year
Labour costs: up by 6 % in 2008 (relative to 2007)
Other input items: up by 6 % in 2008 (relative to 2007)
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Feed in 2009
Feed usage: Weather conditions have a strong impact
not possible to predict weather in 2009
dairy feed: volumes revert to average of last five years
beef feed: unchanged on 2008 level
Cereal Prices: 2008 harvest prices down 30 % on 2007
Feed Prices: Price drop of 15 to 20 % on 2008 level
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Crude Oil in 2009
Futures market as of November 2008
crude oil futures price on average for 2009 is about $55 pb
about €44 pb (at current exchange rates - $1.25/euro)
Average crude oil price in 2009 ?
in the range of $50 to $60 ?
a decrease in the range of 30 to 40 % on the 2008 level (at
current exchange rates)
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Fertiliser in 2009
Weaker demand: pulling down fertiliser prices falling energy prices falling commodity prices credit problems for farmers
Urea prices down 20 to 40 % on the 2008 level would put urea prices back to 2007 average levels
Downward adjustment in CAN price can be expected Reduce fertiliser bill by switching away from CAN to urea
P & K: Demand to remain strong P & K prices are unlikely to fall
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Energy (Electricity & Fuel) in 2009
Electricity prices lag changes in international energy prices
ESB request for another price increase denied
But decrease in electricity prices is unlikely in the short term.
In 2009 prices will be unchanged on 2008 level
Substantial reduction in price necessary in 2009 to push prices
below 2008 level
However, with falling oil price - fuel prices should drop by 20%
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Labour costs & general inflation in 2009
Labour costs to rise by 2 to 3 % Economic downturn to continue into 2009
Unemployment rate rising to 10% in Ireland
Dampens wage expectations
Inflation rate to fall to 2 % Sizable reductions in price of major inflation items,
such as fuel, food, mortgage interest
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Summary
Expenditure on many cost items rose sharply in 2008
Price increases were the main reason for increased
expenditure
Considerable cost reductions likely in 2009 Mainly due to lower prices
But some output prices also dropping
Not possible to generalise on the impact on margins in
2009 as outcomes are sector specific
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