Thursday 20 September 2012

Higher Costs at the Supermarket and the Farm

Headlines are supposed to grab your attention. This one from Thursday's UK Guardian certainly grabbed mine:

Mass slaughter of farm animals set to push food prices up 14%
Farmers who cannot afford feed 'liquidating' pig and cattle herds will drive food inflation to record high, says Rabobank report

There's a lot going on here. Higher food prices are normally good for farmers, but for every soybean and grain farmer who's smiling, there's a livestock producer who's very worried about the next few months.  The drought in the heart of North America's breadbasket this summer is the lynchpin of all of this,  leading to smaller harvests and much higher prices. The first to feel the impact are the hog and cattle farmers who buy corn and grain, and then hope they can recover the costs when the animals are sent to slaughter months later. Two of Canada's largest hog operations in Manitoba have already filed for bankruptcy protection, claiming they're losing $50 on every hog they're shipping. For Maritime pork producers a lot will depend on whether they grow or buy their feed, but even on farms where feed is grown there must be a lot of head scratching: sell the grain at a guaranteed hefty profit, or feed it to pigs and hope the eventual sale price is profitable.  There's already been a huge drop in the number of hog farmers in this region, really only the hearty few survive, but for how much longer?

It's a slightly different story on cattle farms, and in a perverse way this might create an opportunity to push the Maritime beef industry in a new direction.  I've written a fair bit (a search box at the bottom), and most will have heard about "grass-fed" beef.  Essentially this brings cattle back to the role they traditionally played on farms before the development of feedlots, and marbled beef after the second world war.  It used to be that cattle would  eat off pastures  on poorer farmland during the summer, and then hay stored for the winter.  The downside, steers take months longer to get to market weight, so farmers need a higher price, and depending on the genetics, the beef won't be as tender.  Now there's no question that grain-fed, feedlot beef creates low cost meat that feeds a lot of families. The McDonalds, Burgerkings, etc. of the world  dominate the urban landscape for a reason, but there are environmental and health costs in all of this: the overuse of  antibiotics in feed, huge concentrations of cattle waste.

There are a handful of farmers in the Maritimes producing grass-fed beef, and there is some discussion at the  Albany Beef plant of marketing  the product. Right now cattle producers here have a hard time competing with beef producers elsewhere with access to cheaper feedgrain.  The fact is that  farmers here can grow grass and silage as cheaply as anywhere else. The grass-fed beef would also give the beef plant a possible niche market that might help its bottom line too.

There is a big but of course:  grass-fed beef will be seen as an up-scale product that will be more expensive for consumers, and will be tagged as elitist.  Right now it is, but if the predictions of much higher feedgrain costs and beef prices hold true, then maybe this is the moment to think about doing something different. If the alternative is to get out of the business because grain prices are too high, then putting cattle back on grass and trusting that there will be enough consumers willing to pay a bit more I think is the better choice.

Here's the rest of that scary article, and notice how food speculators once more see a windfall.

Mass slaughter of farm animals set to push food prices up 14%
Farmers who cannot afford feed 'liquidating' pig and cattle herds will drive food inflation to record high, says Rabobank report

    by Rupert Neate, Josephine Moulds
    Sept. 19, 2012

The mass slaughter of millions of farm animals across the world is expected to push food prices to their highest ever levels.

As well as hitting consumers' pockets, the predicted 14% jump in food prices will also dash the Bank of England's hopes of pushing inflation down to 2% by next year.

Farmers across the world have begun a mass slaughter of their pig and cattle herds because they cannot afford the cost of feed, which has soared following the worst US drought in living memory, according to a report published on Wednesday.

Experts at investment bank Rabobank warn that the mass "herd liquidation" will contribute to a 14% jump in the price of the average basket of food by next summer.

On Tuesday, the Office of National Statistics (ONS) said lower food prices had help bring inflation down to 2.5% in August.

That brings it closer to the Bank's 2% target and should help consumers who have seen their spending power shrink as wages fail to match inflation. The Bank expects inflation to ease below the 2% target by early next year, but that could be scuppered by rising food, oil and commodity prices.

Rabobank said the slaughter of millions of pigs has already led to a 31% increase in the price of pork and the costs of other meats are also expected to soar as "US livestock herds are likely to be liquidated at an accelerating pace in the first half of 2013".

Nicholas Higgins, a Rabobank commodities analyst and author of the report, said: "There will be an initial glut in meat availability as people slaughter their animals to reduce their feed bills. But by next year herds will be so reduced that there won't be enough animals to meet expected demand and prices will soar."

US farmers, who are suffering from the worst drought since the 1930s, have already reduced their cattle herd to the smallest since 1973.

While all meat lovers will be affected by the record-breaking price rises, Higgins said bacon butty fans may suffer the biggest increases because it is easier for farmers to slash and rebuild pig herds that cattle.

"Farmers cut back pigs because they can rebuild them the quickest. Replacement cattle take a lot longer to breed – a year and a half compared to six months for pigs," he said.

The report said the mass slaughter of pigs had led to a steep decline in the price of pork for delivery next month, but a 31% increase for pork delivered in July 2013.

Because meat and dairy products already account for 52% of the cost of the average global basket of food Rabobank predicts the overall price of the basket will soar to a record 243 on the United Nations Food and Agriculture Organisation (FAO) index next summer.

If Higgins' prediction is correct it will be the highest the index has ever reached and 175% higher than it was in 2000.

Higgins said he did not expect a repeat of the 2007-8 food riots in developing countries across the world because most meat is consumed in the west.

"People are less likely to be irate over meat prices when they can switch back to staples – an option not available in 07/08 due to severe shortages of wheat and rice," he said. "The risk [of riots and social unrest] is still there but it is not as high as 07-08. The prices will hurt here [in the west] more."

But he said western consumers are unlikely to significantly change their diets or become vegetarian in response to price rises.

Higgins said the major danger to global stability was the threat of countries stockpiling supplies. "We've already seen the first indications of that, with Indonesia hinting it is going to increase corn stock pile levels, South Korea considering a domestic purchasing regime and very strong wheat purchases in Iran disproportionately higher than in its past history."

While the food price spike is likely to lead to an increase in starvation and malnutrition across the world, global food traders are expecting bumper profits. The multimillionaire head of Glencore has said the US drought will be "good" for the commodities trader because it will lead to opportunities to exploit soaring prices.

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