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Preparing for the worst in 2009

Preparing for the worst in 2009

"If the money measures taken in the USA, Europe and elsewhere across the globe don't work there's an evens chance of a real depression in agricultural markets," says Practical Farm IDEAS editor Mike Donovan. It's painful to look at the last world crash in 1930, which had farmers across the USA living hand to mouth. The relentless squeeze on farming margins from the food and retail trade will not be eased in the coming months. He ends the think-piece by giving an action plan for farmers.

In July 2008, six months ago, Goldman Sachs predicted the oil would continue to rise, reaching $200 a barrel. The World Food Organisation saw wide scale hardship caused by the continuing rising price of food commodities. Farmers bankers were taking a relaxed view of their farming loan book.

There was slightly greater concern by the end of 2008. The rapid slide of the grain price had farmers holding back on marketing their spot grain. Futures prices for 2009 and 2010 lost less ground, and some farmers have taken courage and decided to lock part of their future harvests in at prices which they see will at least give a positive return. Many have sat on their hands, waiting for another explosion, and many spot sellers are looking for a significant rise in price before the 2009 harvest.

Oil producers, meanwhile, have been hunkering down to $40 / barrel oil. Production grew in 2008, and now the price is so low companies are storing it in tankers moored off the coast rather than marketing it - the exercise made possible by freight rates collapsing to 10% of their value six months earlier. Supplies of copper, aluminium, steel which were so tight in 2008 turned right around, causing a nightmare for recyclers as well as production companies, which closed facilities.

Farming leaders see no storms
At the January Oxford farming Conference, Wayne Jones, head of Food Trade at the OECD said that the high prices of early 2008 would not be repeated in the short term, "But on average over the coming decade prices in real terms of cereals, rice and oilseeds are projected to be 10% to 35% higher than in the past decade." The big consulting companies are all seeing a a minor short term blip in farm gate prices as the supply demand equation balances itself, but nothing too major, while on the input side prices, such as diesel and cattle feed have eased slightly. HSBC's Pat Tomlinson sees the lowered value of £sterling as a major benefit to UK farming, and believes the Total Income From Farming figure for 2008 will be another peak for the industry, even though in real terms it is less than half that of 30 years ago. David Cousins of Bidwells says "Having focused on the production aspects, we must not lose sight of the market place around us and executing a well structured marketing policy based on realistic and attainable targets will go a long way towards this." He goes on to ask "So what do the markets have in store for us in 2009? Certainly the retailers will be maintaining their pressure on delivering "value" to their customers and trying to limit the effects of food price inflation. However, in the longer term, the fundamentals that created the rise in prices a year ago, remain sound. The demands of an ever-increasing world population and the supply constraints of land availability, water shortage, climate change and limited technology, remain strong. As a result, there is good reason to suggest that the powers of supply and demand will be the dominant force in the agricultural economy, whereas the worldwide economic downturn will dominate the industrial and service sectors. The general economic climate will no doubt have an impact, but as markets stabilise and then recover, the agricultural sector could well be one of the first to benefit."

It all sounds reasonably benign. Not one guru is a harbinger of doom.

Agricultural forecasters base much of their analysis on supply - acreage, weather, crop stocks. Demand is seen as less volatile, growing with population and also with consumer wealth, particularly in developing countries.

Despite this steady state, farmers have experienced markets moving much faster, and there's no reason why this should not continue to be a feature of 2009. We are all aware that market forces are all to do with power. The hold of the consumer over the supermarket, the supermarket over food manufacturer or processor, the processor over the farmer. If the consumer demands increasing value, the current trend, so her supplier competes to with other supermarkets to satisfy. The '50p off', 'two for one' impacts on supermarket suppliers who endeavour to maintain their margin, and so ask their suppliers, the numerous farmers, to take a price cut.

I think that if the money measures taken in the US and Europe don't work there's a evens chance of real depression in agricultural markets. That's what happened in the 30s, particularly in the USA, the world's bread basket at the time. British agriculture supplied a fraction of domestic needs, and so was less affected, but it still was a tough time for farming. Tenants were offered the freehold of farms for peanuts, but were mostly unable to raise the funds.

The Great Banking Depression of 2009 will occur if economies stagnate. If the people's concern for the future causes a drop in consumption, so unemployment will turn the screw on all who remain in production.

The possibility of this scenario is worth contemplating, for it involves many present day aspects of the farm business - investment, marketing and planning. It makes financial gearing - the proportion of assets borrowed - significant. Every economic cycle presents opportunities to those in the right place and with the right assets, and today's downturn is no different.

The essentials are to:
A. Know your costs. B. Assess the risks - the other businesses that you depend on for survival. C. Explore alternatives, substitutes D. Be vigilant, keep networking (such as through British Farming Forum).

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