Milk and grain prices out of kilter with production costs

Extreme peak-to-trough price seesaws are familiar to pig producers. Such is the volatility of the sector that only scale and efficiency have kept producers in business. It will take time for pig producers to rebuild their finances after the recent extended loss-making period. Falling product prices, allied to historically high input costs, have resulted in very high debt levels among those still in business after financing their production losses through borrowings. A dig out from Government provided welcome, if limited, respite that probably prevented more producers from going out of business.
While the pig sector has returned to profitability and the medium-term outlook is positive, the contagion of falling prices has now shifted to the milk- and grain-production sectors. From historic highs, the ex-farmgate prices of both grain and milk have fallen by more than 30 per cent in recent months. This puts both commodities firmly into loss-making territory. As milk falls below 40c/L, a baseline figure below which producer confidence is totally eroded, there are few milk producers who can break even, never mind make a profit margin. For grain producers, the move into loss-making territory is the same or even worse. While production costs have fallen back in both sectors, they are still high compared to where they were two years ago, especially across energy, fuel, and other inputs. Much is made of fertiliser prices moving downwards, significantly. What is not highlighted is that a large proportion of the annual fertiliser tonnages used on dairy and tillage farms, annually, was spread in the early months of the years when fertiliser was up to €300 per tonne more expensive than current quoted prices and even higher if bought forward last autumn as was being encouraged by some merchants. This spring was one of the wettest on record, especially during March and early April when milk producers would have hoped to have a large proportion of the cow’s feed intake requirements supplied by grazed grass. Expensive concentrate inputs as well as large tonnages of silage were used to maintain yields and output. Those costs are, for the most part, not yet paid off. With base milk price well below 40c/L for May/June and onwards, those meal invoices must be paid for with lower milk price remittances over the coming months. Likewise, there will be a considerable cost associated with replenishing silage stocks, completely depleted by heavier than anticipated feeding through February, March and April. Agricultural contractors have been warning that their charges will be higher this year, adding to an increased production cost base on dairy farms. Meanwhile, tillage farmers are facing an income Armageddon, with forward barley and wheat prices quoted last week at €193/t and €203/t respectively. Even rapeseed prices have collapsed close to €400/t, pulled down by weakening global soya bean prices.
Any suggestion that profits earned on foot of higher prices in 2022 will be available to cushion current commodity price falls is misplaced. Producers mostly use higher returns to reinvest in their businesses, replacing worn-out tractors, combines, sprayers and tillage equipment, in the case of grain producers. The same mentality of reinvestment and upgrading is common among milk producers. The bottom line is that there is no financial reserve capable of counteracting a 30 per cent reduction in output prices.
Without being overly pessimistic, an extended summer drought, which looks possible right now, can only make a difficult situation even worse. That’s without factoring in large tax bills for 2022 which will come due next November.