Compared to Last year, Producer prices are currently favourable. According to Agrimark Trends, they increased 20,4% between the first quarters of 2006 and 2007, while the price of farm requisites only increased by 5,25%. Thus farmers are better off than a year ago. T he outlook for producer prices remains positive for the next five to 10 years. This will help farmers improve their financial position, which deteriorated over the past few years. However, there’s a real danger that higher input prices may cancel out higher producer prices. Input price expectations Global oil consumption grew by 0,7% in 2006, the lowest growth since 2001 and about half the average 1,5% per year over the last decade. Production cuts in OPEC countries meant oil production barely increased. Total production for 2006 reached 81,7 million barrels per day – only 0,4% higher than 2005, while total consumption was 83,7 million barrels – a 0,7% increase. The higher growth rate in consumption than in production put upward pressure on crude oil prices. During 2006 Brent crude oil traded at an average US per barrel, up 20% on the 2005 average. In July 2007 prices increased to 78/barrel (see Figure 1). In spite of talk about the dangers of depleting the global oil supply, the reserve to production ratio has remained steady for over 40 years. We aren’t running out of oil and current higher prices may even result in an increase in proven reserves.
While OPEC limits production, oil prices will stay high and are unlikely to be lowered by a stronger rand. S ince 2006 the grain price increased substantially due to the development of the US biofuels industry. The Bureau for Food and Agricultural Policy (BFAP) expects higher maize prices to cause a sharp increase in maize production from about 7 million tons in 2007 to 11,9 million tons in 2008, decreasing to 9,1 million tons in 2009 with a slow increase thereafter to 10,1 million tons by 2012. Yellow maize prices will, according to BFAP, decrease from R1 607/ton in 2007 to 215 in 2008, with a gradual increase to 525 by 2012. BFAP estimates total soya bean production at 203 000 tons in 2007, increasing sharply to 430 000 tons in 2008. Soya bean prices are expected to remain firm at R2 200 to 800/ton, while the soya bean oilcake price will increase from 070 in 2006 to 941 in 2012. Higher maize and soya bean prices will raise feed prices by 20% from 2006 to 2012. Fertiliser prices have increased because they’re closely linked to rising international oil prices.
Low cereal stocks and high cereal prices have increased fertiliser demand. demand for grain for biofuels production also increased fertiliser demand. Since we import all our potassium needs and 60% of our nitrogen needs, exchange rates strongly determine fertiliser prices. net fertiliser price of the Fertiliser Society of South Africa (FSSA) increased by 9% from 2005 to 2006. Implications for farmers Higher input prices will hurt farmers’ future profitability. They’ll have to manage their businesses carefully to create wealth. Although all indicators are that producer prices will remain firm for the next couple of years, they’ll drop again in time. trict cost control remains a prerequisite for farming success. Skimping on variable costs can result in spectacular production failures and farmers shouldn’t cut back recklessly, but should rather make sure they get their resources at the best possible prices and use them optimally.
When producer income increases it’s easy to buy the capital goods which farmers managed to get by without in the leaner times. While farmers must invest in modern technology if they want to survive, this investment must also be affordable. outh African farmers may be entering a period of higher profitability, but only those who increase efficiency while keeping costs down will reap this profit. |fw Dr Koos Coetzee is an agricultural economist at the MPO. All opinions expressed in this column are his own.