August 30, 2007

 

High wheat, feed prices stir trouble for EU livestock sector

 

 

Record prices for European wheat are seen to lift costs for livestock producers, millers and biofuel refiners and later raise meat and flour prices while slowing EU ethanol output, analysts say.

 

EU's key wheat producing nations France, Germany and UK were hit by drought in April followed by constant rains at harvest time at a time of tight global grain stocks. In Eastern Europe, drought and extreme heat reduced production in Hungary, Romania and Bulgaria.

 

Stephane Delodder, Rabobank's associate director of food and agribusiness says the prices have "pushed major markets through the roof" and seeming to trail an "undiscovered terrain".

 

French-based Liffe milling wheat, the benchmark EU grain contract, has soared as much as 91 percent since early April to a record high of EUR244.75 a tonne as of August 28. Nearby London-based Liffe feed wheat also jumped 78 percent to a record top of GBP165.25/tonne at the same period.

 

Delodder says a bumper crop was needed to replenish stocks following last season's lower EU and world wheat crops. A report from France-based Strategie Grains now predicts EU 2007 cereal output to be 2 percent below last year's weather-reduced crop.

 

To make up for last season's gap in supplies, the European Commission sold grain held in public intervention stores back into the domestic market. But now almost all of those stocks have been cleared out, leaving no reserves to fall back on.

 

According to Emma Cardy-Brown, Rabobank's feed and animal protein specialist, pork and poultry are hit hardest with tight supplies and high prices. Feed makes up a minimum 50 to 60 percent of the costs of meat goods.

 

According to Deloitte & Touche LLP, many UK livestock producers have seen feed prices rise almost 100 percent. Richard Crane, food and agriculture partner at Deloitte said the current high meat prices are seen to hit the ceiling.

 

James Dunsterville, managing director of Agrinews in Geneva said small profits have stopped chicken producers from increasing their production and this could mean fewer supplies making their way to the retail market.

 

Current supermarket strategies to cut costs in basic goods such as meat and vegetables aren't compatible with the overall inflation of food prices, adds Crane.

 

Dunsterville adds that smaller feed producers in the EU are already starting to go out of business, cutting the number of feed suppliers.

 

EU's strict zero tolerance policy on non-approved genetically modified products is also seen to restrict grain production as US and Argentina --producers of transgenic corn -- are still not allowed to export their grains, leaving Brazil the only source for corn.

 

Pedro Correa de Barros, president of the EU's Compound Feed Manufacturers' Federation, says a current GMO de facto import ban for corn gluten feed will increase EU feed costs by EUR60 million to EUR90 million on top of the already high grain prices.

 

He adds a similar ban on soymeal imports will "have devastating consequences for European livestock producers, wiping out entire (EU) pig and poultry production chains".

 

Livestock production has been severely affecting in northwest Europe due to high feed, land and labour costs, rising meat imports on top of environmental and traceability programs. The EU's livestock industry accounts for 40 percent of farm revenue.

 

Only the biggest and slickest operations or those focusing on niche/value added segments can survive, says Cardy-Brown.

 

Tesco PLC, UK's largest retail grocer, raised the price it pays its egg suppliers in August by GBP0.04 a dozen as feed costs for free-range producers have risen 26 percent on the year. Peter Kendall, president of the National Farmers Union for England and Wales, said he expects other retailers to follow Tesco's example.

 

The EU's booming ethanol industry is also feeling the pain of higher grain prices. Feedstock costs for biofuel producers are now 50 percent above what they budgeted for, says Crane.

 

Ethanol producers aren't likely to run at full capacity and projects in the pipeline will have difficulty finding funding, says Delodder. He adds this will likely put current projects on hold.

 

Oliver Balkhausen, grain analyst for German-based F.O. Licht says biofuel producers are already showing signs of cutting back such as the German-based biofuel maker Vereinigte BioEnergie, or Verbio, announced last week says it's cutting back ethanol production at a plant in Schwedt/Oder citing the "heavy burden" of high grain prices.

 

Balkhausen expects most of the current tight supply/demand situation is now factored into the market, but warns much still depends on how crops in the southern hemisphere fare, especially in Australia.

 

To help farmers bump up production next year, European Commissioner for Agriculture and Rural Development, Mariann Fischer Boel, has proposed to drop the EU's mandatory 10 percent arable land set-aside program for the 2008-09 growing season. The program was originally set up to handle a glut of EU grain supplies. The Commission estimates this could add up to 10 million to 17 million tonnes more in crops next season.