We have seen the price paid for milk, beef, grain and lamb all increasing in the face of soaring input prices. At this point, indications are that in most cases the increase in output prices should protect profits. But this should not distract from the urgent need to introduce mechanisms that protect farm families from the increased financial risk to which they are now exposed. We only have to look to the pig sector and those farmers who are tied into forward milk price contracts to see the extent of this exposure.

Those wanting to understand the sheer financial hardship facing pig farmers should listen to our podcast with pig farmer Michael Monagle at www.ifj.ie/podcast or read the interview here. The pace at which external factors can now not just undermine the economic viability of the enterprise but also erode equity within the business through spiralling debt levels is frightening.

Point of no return

With losses on the average pig farm estimated to be totalling €90,000 per month, or over €1m per annum, there is no doubt that in the absence of an immediate increase in the price of pigmeat, many farmers will quickly pass the point of no return.

Similarly, we see a number of dairy farmers with a high percentage of milk tied into fixed price contracts set to rack up significant losses this year – losses that will take years to repay or even threaten the future viability of their enterprise.

Unfortunately, the current experience in dairying threatens to undermine the value of forward-pricing mechanisms. It is important to distinguish that the issue with existing contracts is the way in which they were constructed and not the concept of forward pricing.

Forward-pricing mechanisms that are engineered to protect farmer margins are going to be essential.

Locking in to a forward price, for a proportion of output, makes good business sense where there is the ability to protect profit margins by also fixing the price of key inputs. As we have learned, fixing the output price, in the absence of a mechanism to fix inputs, leaves all of the risk inside the farm gate.

Forward-pricing mechanisms that are engineered to protect farmer margins are going to be essential in ensuring the amplified risk burden is shared across the supply chain. Developing such a mechanism in the months ahead will not just be key to protecting the financial fabric of family farms but also in keeping supply chains functioning. While a full hedge may be challenging to achieve, at a minimum farmers need assurances that if costs move outside of an agreed band, the fixed output price will move correspondingly.

Winter finishers

The most immediate demand will come in the autumn from winter finishers where an additional investment of €60,000 per 100 animals finished will be required. It is not feasible to expect these farmers to expose their businesses to this level of risk in the hope that spring beef prices hold up. It is questionable if banks will be comfortable to extend additional funds in the absence of margin certainty.

In the absence of processors/retailers providing winter finishers with contract prices that allow them to assess the market value of forward stores and lock in ration prices, the supply of beef next spring will be severely challenged. Retailers, processors, merchants and importers of key farm inputs need to recognise that the development of forward-pricing mechanisms that spread the risk will be needed to maintain normal trading patterns on either side of the farm gate – particularly in the case of chemical fertilisers.

Confidence to purchase

For merchants and farmers, it makes sense to buy-forward fertiliser in a rising market – as in 2022. Doing so gives importers the confidence to purchase and import product three to four months prior to spring demand.

However, in a market where prices are sustained at historically high levels, the incentive to forward-buy is replaced by the risk associated with a market correction. In this environment, risk is minimised by delaying purchase until point of use.

Will fertiliser importers be prepared to carry the risk associated with purchasing product this autumn at historically high prices which may not be purchased by merchants/farmers until February 2023?

Fertiliser availability

While these importers are likely to have made strong profits in 2022, they will bank this rather than expose their business to a much higher risk and potentially lower-margin market next autumn/spring. The outcome of this will be much lower availability of fertiliser next spring – the ramifications of which will be felt by farmers, processors and retailers.

Clearly co-ops are ideally positioned to develop pricing mechanisms that share the risk across the supply chain, given their commercial arrangements with importers of farm inputs and key customers for farm outputs such as milk and grain.

Meanwhile, beef processors and their retail partners have avoided forward-price contracts to date – but soaring input costs have raised the stakes for winter finishers to a level that no longer makes business sense.