No let up in feed price hike

The new year has barely begun, and already we are having to face up to some alarming twists in the ongoing feed price saga. 2007 has been marked down in history as the year when wheat prices rose to unprecedented levels. And it is now becoming clear that wheat is not the only commodity that has been coming under severe pressure.

NON-GM SOYA AT A PREMIUM

First, the good news: whilst the price of non-GM soya is currently at a very inflated level, this is expected to fall in May when the new harvest arrives. The long-term picture, though, is not encouraging. Soya, which is a vital source of protein and is the second biggest ingredient in poultry feed after wheat, is grown in countries including the US, Argentina and Brazil, with Brazil being the chief remaining source of non-GM soya. GM production was sanctioned there in 2006; since then the proportion of non-GM soya has decreased year on year and the risk of contamination from the GM crop has risen. Dr Steve Pallister, of Lloyds Animal Feeds, says that the shortage could cause some feed producers real problems as suppliers struggle to meet deliveries of non-GM material. This of course has brought financial implications, as with such limited supplies, the premium of non-GM over GM has widened tremendously. There is a growing feeling that retailers may have to reconsider their requirement for free range producers to use non-GM soya. Will Foote, of BOCM PAULS, sees this as inevitable. "Production will diminish and premiums will continue to increase," he predicted. "The availability is simply not there." Martin Humphrey, of Humphrey Feeds, agrees: "We will have to come to terms with the lack of non-GM soya," he said.

SOYA PRICES PUSHED UP BY COMMODITY MARKET

The falloff in production of non-GM soya is only one aspect of the problem. More worrying, perhaps, is the global rise in soya prices. Investment fund managers are increasingly turning their attention away from hard commodities (including oil, gas, gold and other metals) and concentrating on soft commodities such as wheat and soya. Speculation on these essential raw materials has disrupted the traditional pattern. Traditionally, price was dictated principally by supply and demand and followed a predictable graph, rising towards the end of the season as supplies became short and dipping when the new harvest became available. Commodity trading has driven prices up and introduced much more volatility, with prices liable to be affected on a daily basis by all manner of external economic factors. Of course, the sharp price hikes that are a source of such glee for fund managers can spell disaster for farmers, and unfortunately there is not much that the agricultural sector itself can do about this harsh fact – apart from ensuring that retail prices are adjusted to reflect the effect of increased commodity prices on production costs. "The rise will have to be passed on to the consumer. These increases are too large to be absorbed," said Will Foote.

PHOSPHATE SHORTAGE

Phosphate is an essential ingredient of animal feed, necessary for skeletal development and, particularly important from the free range producer's point of view, crucial for strong eggshell. However, the fertiliser industry uses by far the largest proportion of global phosphate production, and the requirements of this sector are increasing. One factor is the new demand for biofuel crops, which has led to a sharp increase in the acreage of cereal crops being planted, and consequently in the amount of fertiliser being used. Another well-publicised factor is the growing affluence in the Far East. Increased meat consumption in countries such as India and China has had a knock-on effect on overall feed prices as more animals are farmed in those countries. The growth in personal wealth brings with it all kinds of side-effects, some of which can impact on feed prices in less obvious ways – for instance, more people can afford to use commercial washing powders, and since phosphates are used in washing powder, this represents an additional requirement for a product that is already in short supply.

Rock phosphate is mined in Morocco and Tunisia where it is converted into phosphoric acid by reacting it with sulphuric acid. At present, phosphoric acid is not being produced in sufficient quantity to meet the growing demand, and this has led to a sharp price increase. One reason for this is that for technical reasons, sulphuric acid has been in short supply for the last few months. This is a temporary blip, as the high prices should quickly stimulate production and restore supplies. But there is a more serious problem in that the reserves of rock phosphate are also running low. This is a major concern, and some scientists are warning that this could happen in less than a hundred years. So whilst the current phosphate shortage is likely to be overcome, a sustainable solution will have to be found; for instance by improving soil technology, making more efficient use of fertiliser and recovering phosphates from organic waste. Will Foote explained that BOCM PAULS are already looking at ways of releasing phosphorus, as well as carrying out research to establish the levels of phosphorus that are necessary – but he stressed that we must not be tempted to pare back too far on phosphates.

OUTLOOK

It seems that high commodity prices are here to stay. The harvest will see a slight drop in wheat prices (Martin Humphrey forecasts this at around £25) but overall the upward trend seems relentless wherever you look, with demand rising in all quarters and supplies falling. Wheatfeed and other organic material is being burnt by power stations as a renewable resource. Poor sunflower crops have created shortages and consequently high prices yet again. And whilst the fund holders are making money, farmers are losing out. "Commodity price rises are fine, as long as the supply chain works," said Martin Humphrey. "Price rises have to be passed on all the way down the chain, right through to the consumer. Otherwise they will kill the industry. The UK free range industry needs to recruit new producers, and in order to do this it has to be profitable."

Fluctuations in the price of oil are reflected very quickly in forecourt petrol prices. Perhaps we should try to get away from the notion that retail egg prices should be set in stone, to be changed only in extreme circumstances and after protracted negotiations, and work towards a more fluid pricing system where the price the consumer pays is directly related to real-time production costs.