July 16, 2012

 

Surge in global grain prices affects EU livestock industry

 

 

European livestock industry, from feed makers to breeders, are hardly affected by a recent surge in global grain prices which may squeeze the already tight margins, and has prompted farmers to call for the increase to be passed on to consumers.

 

Wheat and corn prices in Europe have surged around 25% since mid-June. US soymeal, widely used in feed in Europe, hit an all-time high on Wednesday (July 11) as concerns mounted over drought-related damage to crops in the US and a worsening harvest outlook in Ukraine and Russia.

 

"Animals will have to tighten their belts because their feed is expensive in grains but also in oil meal," Laurine Simon, an analyst with French consultancy Strategie Grains, said.

 

"Farmers and feed makers will look for substitutes, but it's not always possible," she said. "When all products rise at the same time, the room for manoeuvre is thin."

 

Prices of virtually all grains have surged since the end of last year, making it hard for feed makers to avoid passing rising costs onto breeders.

 

In Italy, breeders have had to sell their products at prices below cost, and feed makers have cut margins to a bare minimum because their clients often have no money to pay for feed, said Giulio Gavino Usai, head of the economic division of Italian feed makers group Assalzoo.

 

Poultry and pork producers are likely to be hit the hardest because they use a lot of grain-based feed, mainly wheat, corn and soymeal whose prices have risen nearly continuously since mid-June, observers said.

 

"Cattle mainly eat fodder, and given the bad weather there is plenty of grass," Simon noted.

 

The price ratio between wheat and corn in Europe is currently to the benefit of the latter, which makes observers predict higher uses of corn in animal feed this year.

 

Farm office FranceAgriMer this week said corn use in feed in the 27-member EU would increase 6.3% or 3.4 million tonnes this season to 57.4 million, while soft wheat use would decline 4.7% or 2.6 million tonnes to 52.6 million.

 

"Farmers who have planted corn for on-farm feeding or biogas production might be tempted to sell it on the open market," a German trader noted.

 

The situation is different on international markets, where the price of US corn, boosted by reports of crop damage in the US Midwest, rose so much that it lost competitiveness against wheat, mainly EU wheat on export markets.

 

Traders noted that animal feed producers also face surging prices of rapeseed meal and soymeal, the main sources of protein in feed, as they follow the rise of US soy on the Chicago market.

 

"Price hikes bring uncertainty to the market; people don't know what will happen next. Will prices go down or even rise more? It is very difficult to make decisions in those circumstances," a soymeal trader said.

 

Down the chain, breeders may have to face strong reluctance by meat processors and retailers to pay a higher price at a time when a debt crisis is cutting consumer spending.

 

The head of France's largest farm union, FNSEA, called on retailers to start talks on indexing consumer prices for milk, beef and poultry to the rise in grain prices.

 

"This rally needs to be shouldered by everyone," FNSEA President Xavier Beulin said.

 

A deal sealed last year between French farmers and retailers forces them to negotiate price rises if underlying commodities costs exceed pre-defined percentages, but there are no automatic hikes, which means breeders may struggle to reach a deal.

 

If high grain prices last for months, which most analysts expect, a rise in some food prices seems likely.

 

"Feed already makes up half the cost of an oven-ready chicken, so it is clear that cost increases of this size will inevitably mean higher prices," Peter Bradnock, chief executive of the British Poultry Council, said.