Understanding your global food markets

ver the past 20 years Ireland has relied heavily on the European market for dairy and beef exports. The price premium within the EU meant that exporting to non-EU countries was only viable financially with the help of export refunds in the 1980s and 1990s. However, the price premium that was once enjoyed over global market prices has closed dramatically in recent years.

As a result the European market no longer has the same influence over profitability on Irish farms. This disconnect has become increasingly evident over the past 24 months. Despite many EU member states being caught in the grip of an economic recession, farmgate prices for our agricultural products, like beef and dairy, reached record highs.

The market forces which drove these strong beef, dairy and grain prices in recent years are global. As food producers, Irish farmers need to understand that they are now producing for the global consumer in a global market. While the vast bulk of Irish food exports will continue to be consumed within the EU, the market returns will be more influenced by the global supply and demand balance.

So what influences global prices? The information provided in the following pages of this magazine aims to inform farmers in the main agricultural sectors about their markets and the things that affect them. We present specific information on the grain, dairy, red meat and pig meat markets but we must recognise that they are all inter-related. High supplies of maize this year will challenge the utilisation of barley and wheat. The same high supplies will also reduce grain prices which will decrease feed prices to livestock producers.

While high grain prices can impact negatively on livestock production, low grain prices are likely to have the opposite effect, especially when livestock product prices are high. Low feed costs and high product value will bring their own consequence – increased production will inevitably pressurise the market and decrease prices. Markets are all ultimately related around the globe through grain prices, which can drive different products at different times.

In terms of market forces, ultimately markets are an equilibrium between supply and demand. While there are many additional factors in modern markets, high prices, driven either by lower production or higher demand, will inevitably decrease consumption, which will help restore market balance and adjust prices in time. Low prices have the opposite effect by increasing consumption, again to ultimately rebalance supply and prices.

One of the main factors that influences the market is weather, specifically with regard to growth condition for field crops. These govern supply and this, in turn, influences price and demand. In recent years the drive towards the use of crops for biofuels, driven by the Kyoto agreement, added demand to the market and this increased prices, but also production.

National protectionist policies to protect internal markets are also commonplace. While many of these were removed by previous World trade Agreement, many still prevail. Examples include the taxes imposed on agricultural product exports from Argentina, the prevention of grain exports from countries like Russia and the Ukraine and the quota and ‘source of trade’ controls imposed by China. Many other countries impose tariffs on imports, sometimes in conjunction with quotas.

Fund investors

Market prices, rather than market balance, are nowadays heavily influenced by fund investors. These transactions thrive on price volatility but they are ultimately driven by the fundamentals of supply and demand.

The demand side is also subject to change. The use of products for biofuel production is a well-known example. But things like food scares can heavily impact on the demand for one product type while encouraging the demand for another e.g. red vs white meat vs fish.

Population growth and economic prosperity also drive demand but are also drivers of food choice. Policy also impacts. Relaxation of the one-child policy in China has the potential to drive demand for infant formula to a new level.

An understanding of the forces which influence global agricultural markets is increasingly important. Knowing the trends in grain prices is critical for sensible decisions in livestock systems. Understanding market forces should help make better decisions, either through production controls or forward selling. Price volatility will remain and farmers need tighter management to help them remain profitable.