April 2009 Archives

This week's swine flu "crisis" is a mixed blessing for British pig producers.

Of course there is enormous frustration that the term "swine flu" is being used at all, especially when the virus has never been found in pigs and is very much a human condition.

The NFU has suggested "Mexican flu" would be a more appropriate term - which might help the public image of pigs, but wouldn't do much for Mexicans.

But whatever its name - and let's face it, swine flu is going to stick - the concern for farmers is what effect it will have on the market.

Already there are some onerous signs. Several countries have imposed import bans on Mexican and North American pigmeat, interrupting trade flows and creating a perception that there is somehow a link between eating pork and catching the flu.

News that Egypt is to slaughter 300,000 pigs, ostensibly to "quell any panic", can only exacerbate this fear.

On the back of this, it is little surprise that US hog futures markets have slumped by 10% this week, and news that Italian wholesale pork prices are down 25% brings the whole thing closer to home.

So what's the good news?.....

The relationship between primary producers and the supermarkets is, at best, a prickly one.

Tales of farmer suppliers being dumped on from a great height are commonplace - be it in the form of cancelled orders, demands for "key money" or retrospective price cuts to fund the latest retail promotion.

But pinning down specific cases has been almost impossible, as farmers have been too scared to complain, for fear of being delisted altogether.

Having said that, there are signs that things are improving. The development of "meat clubs" and, more recently, dedicated supply chains in the dairy sector are a sign that some supermarkets are taking their responsibilities more seriously.

Despite this, farmers remain extremely vulnerable, especially in times of recession when competition between supermarkets and discounters has intensified. This week's announcement that the Competition Commission is pressing on with its plans to establish a supermarket Ombudsman is therefore welcome.

The move follows the launch in February of a new, tougher code of practice for the grocery sector. That sought to:
• extend the coverage to more than just the "big four" retailers
• prohibit retrospective changes to contracts
• limit the extent to which farmers have to pay for listings and promotions
• require reasonable notice and full justification before a supplier is delisted

While all these measures are an improvement on what went before, they are only any use if they can be properly enforced - which is where the Ombudsman comes in.....

Everyone knows that the banks are desperate to recoup some cash.

Having invested so recklessly for so many years their balance sheets are a mess and they are under intense pressure from shareholders - in some cases, you and me - to shore up their financial foundations.

It is therefore little surprise to see that, despite Bank base rates of a mere 0.5%, the cheapest loan available on the High Street is 7.9% - and that's on the basis that your credit rating is "good".

Further evidence that the banking sector is ignoring political demands to pass on lower interest rates comes with news this week that the Nationwide is breaking its previous promise to peg its variable rate mortgages to base rates. New customers will now pay 4% instead of 2.5%.

But what about the farming sector?

Ask any banker what their approach is to agriculture and they all say they see it as a relatively safe bet and are happy to continue lending to farmers at competitive rates.

Unfortunately, what they say in public and what they do in private seem to be two entirely different things.......

This week's Budget has been almost universally condemned in the mainstream media.

The Telegraph, clearly no friends of New Labour, described the increase in top-rate tax to 50% as "a return to class war", while The Guardian, generally more chummy with Gordon Brown's government, spoke of "Labour's last gasp".

Certainly the "bigger picture" stuff does leave you wondering. The Chancellor's forecasts for economic recovery look massively over-optimistic, while his policy to "tax and spend" our way out of recession is a gamble.

Time will tell whether he has got it spectacularly wrong or made the best of a bad job, though no one seems very optimistic.

But within the world of agriculture, there are undoubtedly more positives than negatives to emerge from the acres of small print that always accompany the Chancellor's speech.

The key positives are as follows:

• Capital allowances will double to 40% for this financial year only. The first £50,000 of any new investment can already be set against tax under the Annual Investment Allowance. But 40% of spending above that level on plant and machinery can also be claimed against tax. Sole traders, partners and farming companies can apply

• Agricultural Property Relief is being extended to the whole of the European Economic Area. Until now, farmers could only claim this relief from 40% Inheritance Tax on agricultural property in the UK. But this is now being extended to property held in the EEA

• Enhanced loss relief is being extended for two years. This means any trading losses made in 2008/09 or 2009/10 can be offset against profits made in the three previous years and used to claim a tax rebate

• The situation regarding VAT and farm rents has been clarified. It had been feared that, since VAT was cut from 17.5% to 15% last December, this could constitute a "change in rent". As such, rents on AHA tenancies could not have then been reviewed for another three years. The Budget confirms that this will not be the case

• Other more general positives include the decision to increase the maximum amount that can be saved tax free in ISAs to £10,200, an increase in the Capital Gains Tax threshold to £10,100 and the introduction of a £10m grant scheme for anaerobic digesters and composting machines

• The £2000 "scrappage" scheme for cars over ten years old should also have an "agricultural relevance"

Then there are the negatives:

So Tesco has posted another set of record profits - prompting admiration and abuse in just about equal measure. A quick skim through the FWi forums reveals this split reaction.

Some refer to Tesco as a "virus" that attempts to dominate the market through aggression. The profits it makes are referred to as "blood money" and one farmer predicts that Tesco will ultimately fail "as all empires based on greed fail".

But others take a more positive view, describing Tesco as "incredibly innovative" and "lean, mean and hungry for business".  "I'd rather deal with a firm which shows a profit and has a positive net worth," said one contributor.

For my part, I like to look at the numbers to get a perspective. The headline figures show that Tesco achieved a £3.1bn profit on a global turnover of £59bn in the past year - giving a return on sales of about 5%.

Over a similar period, British agriculture achieved a net income of about £3.5bn on agricultural output of £20bn - a return on sales of about 17%, and a seemingly better performance even than Tesco.

But take away the £3.2bn single farm payment - well, it is supposed to be decoupled after all - and UK farming "profit" drops to just £300m.

Today's (22 April) Budget by Chancellor Alistair Darling is likely to set out a number of measures to help boost the struggling economy. But, aside from any big announcements that affect everyone - such as changes to income tax, VAT, or the like - what will be the main decisions affecting farmers? We'll be keeping tabs below: 

There's never any shortage of data when it comes to the grain trade.

Among the more recent to cross my desk are the monthly production forecasts from French analysts Strategie Grains, latest stock predictions from the US department of agriculture and new export data from EU and UK sources.

The crop production forecasts contain few surprises.

At EU level, Strategie Grains is still putting the 2008 wheat crop at 140m tonnes, which compares with the previous season's 112m tonnes. Taking into account reduced plantings and lower anticipated yields, this year's EU wheat crop is forecast at 131m tonnes - a drop of 6.4%.

At global level, the USDA also confirms the record crop for 2008/09, with wheat output put at 609m tonnes, slightly down on the previous month's figure as it trimmed its production estimates for North Africa and South America.

This is leading to a reasonable level of stock rebuilding, following a decade of declining world wheat reserves. The USDA predicts that by the end of the 2008/09 season global wheat stocks will stand at 156m tonnes, up 30% on the year. Most of it will be held in China, the USA and Europe.

Talk about information overload. It may be almost a week ago, but the EBLEX/BPEX Outlook 2009 conference in London has still got my brain spinning!

To say that the conference was "comprehensive" is an understatement. Just about every aspect of the meat industry was covered. At times the sheer volume of pie charts, bar graphs and clever graphics became a blur.

The presentation by Ed Garner of market researcher TNS Worldpanel was a case in point. His run around the world of retailing contained no fewer than 172 overhead slides delivered in a just 25 minutes. That's equivalent to just 8.7 seconds per slide - enough to give anyone a headache!

Overall, the message from the conference was positive. The general view was that, for each meat product, supply would remain tight in the short term, so helping to underpin the market.

Longer term, prospects were also good, as income and population growth would lead to a recovery in demand, and prices would have to "trend upwards" if primary production was to keep pace.

But, despite this "glass half full" perspective, there were a number of alarm bells which need to be monitored closely.

One that struck me came from Ed Garner's paper. While most speakers referred to some impact of the recession on consumer spending, this was at times under-played.

Looking at the data in the cold light of day, it seems there has been a dramatic shift in consumer spending patterns.

Who'd be a sheep farmer? Quite apart from the hard graft and having to deal with the most stupid animal in the farmyard, the lack of sustainable profit must be soul destroying.

OK, so things may be looking up at the moment. According to Stuart Ashworth of Quality Meat Scotland, supply is tightening, while demand has grown steadily both at home and abroad.

Exchange rates have also boosted returns, he told the recent EBLEX Outlook conference, making British lamb more competitive in the export market and imported lamb more expensive at home. Imports are also being hit by the shrinkage in the New Zealand lamb flock.

And, while prime lamb prices have climbed steadily, topping 400p/kg dw for the first time this week, there are signs that input costs, such as feed and fertiliser, are heading in the opposite direction.

So far, so good!  But then Mr Ashworth tossed in a few "wild cards", which could change things for the worse.....

The South Koreans have a reputation for being slightly barking. Don't believe me? Then check out the picture below from the 2005 WTO ministerial meeting in Hong Kong.

While other nationalities resorted to traditional methods of protest, such as smashing office windows and setting fire to cars, those crazy South Koreans made their anger known by donning orange life jackets and leaping into the polluted harbour waters.

Given such excentricity, it was no surprise to read about another novel idea that is currently doing the rounds in South Korea.

According to a report in The Korea Herald, the government has recently launched proposals for aged farmers to fund their retirement by taking out a "reverse mortgage" on their farmland.

Already available on houses, the concept involves the farmer - who must be over 65-years old and have at least five years farming experience - taking a mortgage from the government to convert the equity in his farm back into cash.

Two schemes are available - one that allows the farmer to take a monthly payment until his death, and one that enables him to take a monthly payment for a fixed period, for example 10, 15 or 20 years, depending on how optimistic he feels, I guess.

At the end of the period, or on his death, the farmer's heirs can choose to pay back the debt incurred by the reverse mortgage and keep the farm or...

The recent "Ensuring a sustainable dairy supply chain" report from DairyCo makes for alarming reading, suggesting that over half the UK's dairy products could be imported by 2030, and that butter, powder and cheese production could be a thing of the past.

It goes on to call for more support from the whole supply chain, to ensure that everyone gets a fair slice of profit and farmers in particular have the confidence to invest.

Sadly this does not seem to be happening.

Figures in the report show that, in the liquid sector, processors are making a 46% gross margin, based on a purchase price of 25.6p/litre and a selling price of 47.13p/litre. The margin, of 21.5p/litre, is 3p/litre higher than it was in the 2007/08 milk year.

In the cheese sector too, the report points to hefty margins higher up the supply chain. For example, in the mature Cheddar market, retailers are making a 50% gross margin, based on an equivalent purchase price of 34.18p/litre from the processor and a selling price of 68.95p/litre to the consumer.

Looked at another way, the retail price of Cheddar increased by almost 10p/litre in 2008/09, yet 7p/litre of this went to the retailer, while processor margins were static.

Of course these figures do not represent "profit" as there are plenty of other costs that have to come out of them. But they do give a good idea of what the "take" is further up the supply chain.

And what of milk producers?

The UK has a habit of underperforming in European league tables.

From last year's Euro2008 football competition (did not qualify) to the previous year's Eurovision Song Contest (did not score) our record in Europe is seemingly one of predictable failure.

It is therefore surprising, to say the least, to find ourselves up near the top of one Euro league table - and that is the list of "real income per agricultural worker" just released by the EU Commission in Brussels.

Believe it or not, the UK lies fourth in the table, having achieved a 17% average income gain. Indeed the UK is only topped by Bulgaria and Romania - both emerging from peasant-based agriculture - and Hungary, which faced a significant drought in 2007.

In comparison, our arch rivals - I mean European partners - the French suffered a 10% drop in their farm income per worker, while the poor old Danes were down a massive 25%.

The reasons for the general malaise in EU farm incomes are clear. Even though crop and livestock output were marginally higher in 2008 than 2007, input costs were up by more, due to inflated fertiliser, energy and feed costs in particular.

The UK was certainly not immune from these cost rises...

It was former chairman of the US Federal Reserve, Alan Greenspan, who famously said that if you want to know which way the currency markets are going, best "flip a coin".

Sensible advice indeed - though given his 18 years in office I suspect he had a better idea than most which side up the coin would land.

But the general sentiment is correct. Currency markets are notoriously difficult to predict and few people - least of all those who actually work in them - are ever prepared to say which way they are going.

That's not much help to those farmers who are considering locking into the current exchange rate for their 2009 single farm payments and who have only a few more weeks to make up their minds.

Pre-booking euro rates now may guarantee a premium over last year's payments. But sticking with sterling may be better still if the pound continues to fall between now and 30 September, when the SFP conversion rate is actually fixed.

I'm certainly no expert, but having spoken to a number of brokers in recent days - and persuaded one or two of them to get off the fence - there does seem to be a view that.....