Recent inflation data for Ireland shows that the period of rapid price rises across the board seems to be over for now. Next week we expect the European Central Bank to cut interest rates, a sure sign that it believes we are back in a period of slower price increases.

For farmers, the key element of input price moves has been the very rapid changes in the cost of fertiliser, feed and fuel over recent years (see Figure 1). The outlook for all three now appears to be more settled.

Fertiliser

On fertiliser, the main drivers of the surge in prices in 2022 – the rapid rise in gas prices and the disruption to global supply chains in the wake of the Russian invasion of Ukraine – have both waned considerably in significance.

Gas prices in Europe are currently at about a third of the average level seen in 2022, and are at 20% of the peak hit in that year. In the US, gas prices are even lower than they were in 2019 and 2020. The supply restrictions and disruptions caused by the war in Ukraine have also eased, as companies find workarounds and other sources of supply.

Low levels of global demand – driven by recent high prices – are also having an effect. According to the latest report from the EU-funded Food Security Portal, urea prices fell further in April and global supplies are ample. There are increased exports from China, which should help lower prices further in the coming months.

The main risk to the outlook is tensions in the Middle East, where a significant portion of global supplies are sourced.

In a similar vein, Fitch ratings recently updated its short-term fertiliser price assumptions, cutting its projected price for ammonia. However, it warned that industry capacity expansion is likely to run behind demand for urea in the medium term. The company sees urea prices 15% lower than 2023 this year and a further 10% drop in 2025.

Feed

The global outlook for crop production this year generally appears to be quite good. While the terrible weather seen in Ireland over the autumn, winter and spring months will hit yields here, global markets seem set to have ample supplies of key crops for 2024.

Latest global market prices show that wheat, maize and soybeans are all 20% lower than a year ago, with forecasts from the United Nations Food and Agriculture Organisation showing that supplies of all three are set to rise in 2024.

Current crop reports for the northern hemisphere show that sowing season is well underway in good conditions in North America, while European farmers, with the exception of Ireland and the UK, have had a strong winter wheat crop and have been able to start spring sowing earlier than usual due to warm temperatures.

Feed prices in Ireland have dropped over the past 12 months by around 15%, which would imply that there still may be some room for further falls. However, reduced national supply after the disastrous winter could have a marginal effect on prices (Ireland usually imports around 75% of the grain needed for feed supplies).

Fuel

The global price of oil has generally remained in the €70 to €90 a barrel range since late 2022 and there is little on the horizon to suggest we will see a major price drop from here.

On the demand side, continued sluggish global growth means that there is unlikely to be a major uptick, with the International Energy Agency cutting its forecast for global demand in recent weeks. While the Organisation of the Petroleum Exporting Countries (OPEC), the cartel which controls much of global oil supply, is much more optimistic about global demand in the coming years, it has also kept a tight rein on output in order to keep prices higher than they otherwise might be. Overall, this suggests that there is not much reason to expect a significant price drop in the price of diesel over the coming months. Further, the restoration of the final portion of the excise duty on fuels, due in August, will add another couple of cents to the price of fuel. Over the medium term, the price of fuel is more likely to be driven by carbon taxes rather than major changes in the cost of oil.

Irish carbon taxes are set to increase every year until 2030 when they will reach €100 per tonne of CO2. This will mean each annual October budget between now and 2030 will add around 3c on to the price of a litre of fuel.

The other side of the energy mix for farmers, particularly dairy farmers, is the price of electricity. There is a lot more good news on the outlook for that side, with the price of electricity forecast to continue to fall this year and into next year.

Ireland still remains very exposed to international oil and gas prices when it comes to electricity production here, but the increase in electricity from renewable sources both provides a relatively cheap source of power, while also shielding the country from price shocks driven by unexpected global events which could hit commodities.

Other costs

Data from the Central Statistics Office shows that outside of fertiliser, feed and fuel, the costs of running a farm are only going in one direction – higher. The cost of maintenance, veterinary and other services have all risen more than 10% in the last three years (see Figure 2). For anyone that has outstanding debt, the rapid increase in interest rates has also led to increased costs over the last couple of years.

Comment

Increasing costs for farmers reached crisis point in recent years, with many having to make decisions about where to cut spending. As we reported recently, for many, that decision led to a significant reduction in fertiliser usage.

With the cost of fertiliser now well below the peak, and feed also down on where it was, farmers may be in a better position from a cost perspective. However, prices of those inputs remain well above pre-crisis levels, meaning there has been an overall shift higher in the cost of farming. Also, this does not take consideration of the drop in farm incomes from lower prices on the output side, particularly in the dairy and tillage sectors. For farmers looking to control costs, the task may actually be getting more difficult. While fertiliser may be a major expense, it is a consumable that can be managed. Many of the other on-farm costs such as veterinary fees and maintenance are not so easily managed and are also continually increasing.

Inevitably, these higher costs of doing business will have to be met with higher prices for farm outputs. If that does not happen, we will only see an acceleration of the pace at which people are leaving our largest indigenous industry.