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

Rural Economy Research Centre

Situation and Outlook Conference

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

Rural Economy Research Centre

Situation and Outlook Conference

Lies, Damn lies…..

0

20

40

60

80

100

120

Jan-0

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Nov Dec

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Price change 2008/2007 = 0%

Price change Jan 2008 to Dec 2008 = 66%

Rural Economy Research Centre

Situation and Outlook Conference

Review of 2007 and 2008

Rural Economy Research Centre

Situation and Outlook Conference

Dairy and Beef Feed Usage

0

100

200

300

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600

700

800

900

1000

1990 1993 1996 1999 2002 2005 2008

da

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(k

g/c

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50

100

150

200

250

300

350

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Dairy Beef

Source: FAPRI-Ireland

2008 feed purchases:

• Dairy - up about 6 % on 2007

• Beef – up about 5% on 2007

Rural Economy Research Centre

Situation and Outlook Conference

Feed Prices: 2006 to present

200

220

240

260

280

300

Jan

-06

Ap

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Jul-

06

Oct

-06

Jan

-07

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Jul-

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Oct

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Jan

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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

Situation and Outlook Conference

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

Rural Economy Research Centre

Situation and Outlook Conference

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

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Feb

Mar

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May

Jun

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July

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Sep

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Oct

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Dec

Jan

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May

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July

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Sep

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Oct

No

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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

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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 %

Rural Economy Research Centre

Situation and Outlook Conference

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

Rural Economy Research Centre

Situation and Outlook Conference

Fertiliser Manufacters’ Prices

0

100

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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

Rural Economy Research Centre

Situation and Outlook Conference

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

Rural Economy Research Centre

Situation and Outlook Conference

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)

Rural Economy Research Centre

Situation and Outlook Conference

Looking ahead to 2009

Rural Economy Research Centre

Situation and Outlook Conference

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

Rural Economy Research Centre

Situation and Outlook Conference

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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Situation and Outlook Conference

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

Rural Economy Research Centre

Situation and Outlook Conference

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%

Rural Economy Research Centre

Situation and Outlook Conference

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

Rural Economy Research Centre

Situation and Outlook Conference

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

Rural Economy Research Centre

Situation and Outlook Conference

Thank you

Papers available from

www.tnet.teagasc.ie/rerc