Introduction

1. Over the past few months feed prices, both cereals and proteins, have increased rapidly. Feed wheat prices are currently at their highest level for seven years. Some producers are already paying more for feed but the majority of pig producers have not yet been exposed to higher feed costs, as the common practice is to make feed purchase contracts several months in advance. However, over the course of the next few months an increasing number of producers will have to pay higher feed costs as their current contracts come to an end.
   
   

2. This paper examines the causes of the current situation, what prices are at the moment, how they might change and what effect all this will have on production costs. One factor which distinguishes this from previous problems that have hit the industry - very low prices in 1998, CSF in 2000 and FMD in 2001 - is that British pig meat is not suffering alone. Prices have risen throughout Europe, often by more than in the UK. An assessment is therefore made of how feed costs are changing in other member states.
   
   

3. The feed situation is very volatile this season, and is likely to remain so over the next few months. One example of this is a downwards revision of the 2003 UK wheat harvest by Defra at the beginning of December (of 500,000 tonnes) which put £5/tonne on feed wheat prices in a single day.
   
   

   Table 1: The impact of feed prices on feed costs per pig
   Cereal prices	Feed costs	Soya prices	Feed costs
   £/tonne	£/pig	£/tonne	£/pig
   +£10	+£1.80	+£10	+£0.40
   +£20	+£3.70	+£20	+£0.90
   +£30	+£5.50	+£30	+£1.30
   +£40	+£7.30	+£40	+£1.80
   +£50	+£9.10	+£50	+£2.20

   The Current Situation - Overview

4. The unusually dry growing season throughout the spring and summer affected the wheat harvest in the UK and across much of the EU. Early estimates of the total EU wheat harvest put production down nine per cent on last year, at 94.5 million tonnes. In addition, the hot dry weather and good harvesting conditions have been ideal for the production of high quality milling wheat, but not so good for feed wheat.
   
   

5. The 2003 harvest in Eastern Europe was much poorer than the exceptionally good 2002 harvest. For example, Russia produced 87 million tonnes of wheat in 2002 but only 70 million tonnes in 2003. The Ukrainian harvest fell from 39 million tonnes to 21 million tonnes.
   
   

6. Barley is more resistant to drought conditions than wheat, so production was much less affected (down 2% to 46.7 million tonnes). However the shortage of wheat has also had a knock-on effect on barley and other cereal prices. Although the major cause of high cereal prices has been the impact of the hot summer weather on European harvests, there are several other important factors:

   • Low global stocks
   • Fears that the Chinese may have to begin importing cereals
   • Lower production in the Black Sea region
   
   

7. Despite the price hike this season, UK wheat prices are currently amongst the cheapest in the EU. As a result of this, and weaker sterling, strong export demand (particularly from Italy, Spain and Portugal) has been reported.
   
   

   Figure 1: International Wheat Export Prices (November 2003)
   
   
   

8. Oilseeds have shown even sharper increases due to a very poor soya harvest in the United States, which took prices to a 6-year high. This has in turn pushed up all protein prices. Soya prices dipped below £200/tonne in late November due to a change in market sentiment. Traders on the Chicago exchange were worried that future Chinese purchases might be lower as a result of an ongoing textile trade disagreement. However market fundamentals remain unchanged, so this could just be a temporary blip in the market.

   Future Trends - Overview

9. UK and European feed prices are very much influenced by world market conditions. There is likely to be considerable uncertainty over the next few months, and the market could be very volatile. Much will depend on the weather. Currently the overall trend is for higher prices, as initial indications are that winter grain plantings in the United States and Russia could be poor. In the United States, poor weather has knocked winter wheat establishment, with just 49 per cent of the crop rated "good" to "excellent" compared with 62 per cent at the same time last year.
   
   

10. US prices are currently similar to last year in dollar terms but down in sterling terms, due to the weakness of the dollar. However, there have been some significant increases in sterling terms since mid-2003, and US futures market prices indicate some further strengthening of prices over the next few months. Although the futures prices dip seasonally next July with the harvest, they are still relatively high compared with much of the past few years.
    
    

11. Plantings in the Ukraine and Russia are six to eight per cent down on last year and growing conditions, combined with poor quality seed, are far from ideal. Ukrainian analysts are provisionally estimating a crop size of 10-15 million tonnes in 2004, a good recovery on the 4-5 million tonnes in 2003 but some way off the 20 million tonnes achieved in 2001/02.
    
    

12. Looking at soya, the focus over the next few months will increasingly be on the South American crop, and so the weather will also play an important part in price formation.
    
    

    Figure 2: Movements In US Wheat Futures Prices
    

    The United Kingdom Situation and Outlook

    Prices of feed ingredients - current season
    
    

13. The current season has been marked by a very significant increase in feed prices, with grain prices, protein prices and amino acids all showing major increases. The average price of feed wheat for current delivery is £110 a tonne compared with £70-75 in July, an increase of around 50 per cent. Compared with last year there have been price increases of:

    • Wheat up nearly £50/tonne
    • Barley up £24/tonne
    • Soya up £60/tonne
    • Wheatfeed up £40/tonne
    • Rapeseed up £40/tonne
    • Lysine up £1500/tonne
    • Threonine up £1400/tonne
    
    

14. In addition to the likely short-term volatility arising from weather conditions, there could be increased demand for compounds and supplements from cattle and sheep farmers. Weather conditions have affected the quantity and quality of hay and silage produced in parts of the UK. This may lead to forage shortages later in the season, which will put further upward pressure on feed prices.
    
    

15. Figure 3, which shows current futures market prices (as at 21 November), indicates that the market expects further price rises throughout the remainder of the 2003/04 season. Prices in July 2004, at £113.10/tonne, are £37/tonne (49%) more than in July 2003.
    
    

    Figure 3: Movements In UK Feed Wheat Prices
    
    
    Prices of feed ingredients - 2004 season
    
    

16. Problems with establishing new crops are likely to have a negative effect yields next harvest. Producers in many parts of the country have struggled to complete autumn drilling. The very dry summer followed by unusually dry weather in September and October in the Southern and Eastern regions have made drilling difficult. In some areas, crops have been re-drilled due to poor germination rates. Some farmers will now delay autumn drilling until next spring. This makes it very difficult to predict the likely area planted with wheat and barley and hence the outcome of next years cereal harvest.
    
    

17. Although the current strength in cereal prices may encourage producers to expand the area down to cereal production, many farmers are proceeding cautiously until the full implications of CAP reforms are known. However, the EU commission has recently announced a temporary halving of compulsory set-aside for next years harvest to 5% and this could encourage some increase in plantings.
    
    

18. Futures prices for the 2004/05 season (through to March 2005) are generally lower than year earlier figures but remain higher in the previous few seasons. This suggests that higher feed costs could remain a problem area for pig producers through to 2005.
    
    Compound Prices
    
    

19. Compound pig prices in November 2003 are estimated to be just three per cent higher than in August 2003 and ten per cent higher than in November 2002. These increases do not yet reflect the very large rises in key raw materials, especially domestic wheat and imported soymeal. Spot market prices in November were the highest for six years. This makes much higher pig compound feed prices inevitable.
    
    

    Table 2: Compound Pig Feed Prices
    		Nov-02	Jan-03	Jun-03	Aug-03	Nov-03
    		£/tonne
    Sow Nuts	19% protein	127-135	129-138	132-141	136-146	140-148
    Early grower	20% protein	168-176	171-179	174-182	178-187	184-192
    Grower/finisher	21% protein	142-151	145-154	149-152	153-164	157-166

    
    

20. Feed industry sources have estimated that compound feed prices will have to increase by at least £2-£3 a month up to June 2004. This could, for example mean an average price of grower/finisher feed of £182/tonne, £36 or 25 per cent higher than in November 2002. It is estimated that producers taking out new 12-month supply contracts in January 2004 will face increases of around 22-23 per cent (£30/tonne for sow rations and up to £38/tonne for grower diets) compared with a year earlier.

    The Situation Across the EU

21. Pig producers have had to face increased costs throughout the EU, although the situation has been generally worse in Spain, Italy and Portugal than in northern Europe. This is because these countries are net importers of grain and have had to import from outside the EU, thereby incurring import levies.
    
    

22. At a recent pig meat forecasting meeting in Brussels, the rises in cereal and protein prices were seen as causing considerable concern in most member states, especially when compared against the recent sharp falls in producer prices reported by Spain, Portugal, Italy, France and Austria.

    • Germany reported a 10% rise in cereal prices
    • Eire commented that feed prices have increased by €10 - €15 per tonne since 1 October 2003
    • France 8-10% feed cost rises
    • Portugal remarked that the compound feed industry is currently funding pig producers
    • Spain focussed on the rises in barley, wheat and maize prices and Spanish producers' concern that there could be insufficient feed materials available.
    • Italy reported price rises for corn of 31 % in a few weeks, and price rises since July 2003 for wheat, barley and soya of 128%. 25% and 32%, respectively
    • However, Denmark commented that compound feed prices are negotiated once a year in August, so they felt that Danish prices would not be as adversely affected as in other member states.
    
    
    Table 3: Movements in monthly average EU delivered spot prices
    
    
    

23. In Denmark, bilateral negotiations take place in August between the three or four major compounders and individual pig producers/co-operatives. There will therefore be a range of prices, depending on negotiating skills and what the producers are actually buying. The compounders themselves will have mostly bought grain forward from cereal producers (who are often also pig producers).
    
    

24. Danish producers who use home milling and mixing so far have also been largely insulated from recent price increases. This is because they mainly buy cereals in August and soya in January-February. Nevertheless, they will eventually have to pay higher prices for feed, beginning with higher soyameal prices in the spring. The extent of the cereal cost increases next autumn will of course depend on the 2004 harvest, although initial indications are that prices could remain relatively high.
    
    

25. In Euro terms, feed barley prices are generally between 20 and 30 per cent higher than last year, with the UK being near the middle of the range. Feed wheat prices have increased much more sharply, by at least 35 per cent, with the UK showing the most marked increase of 62 per cent. However the UK feed wheat price is still only around the EU average.
    
    

26. The Euro has strengthened against sterling over the past year, so these price increases are significantly sharper when expressed in sterling. Feed barley prices have increased by between 27 and 40 per cent and feed wheat prices by at least 48 per cent.
    
    

27. Soya bean prices are not available on an individual member state. However, soya is traded in US dollars and, as sterling has risen less than the Euro against the dollar over the past year, this will have lead to somewhat sharper price increases in the UK than on the Continent.

    The Impact on Production Costs

28. The impact of higher feed costs on total pig production costs is a complex exercise. This is because most producers buy for forward delivery, so although they will eventually have to pay higher prices, this will occur at different times. For example, producers can purchase compound feeds on 3,6,9 and 12-month contracts.
    
    

29. For home millers and mixers, many producers have not yet felt the full impact of feed price increases, because they are still paying prices they locked into around harvest. But the majority have not locked into prices beyond January, February or, at best, March. So in the New Year they will suffer the full impact of increases in feed ingredient costs over the past 12 months.
    
    

30. Conventional pig finishing rations normally contain 50-60% cereals, 10% wheatfeed and 12-18% soya. Least cost formulations mean that the impact of higher feed wheat prices may be lessened by some switch to other ingredients, mainly feed barley. Nevertheless, the effect of the feed price increases is that those producers coming off contracts this month are facing increases of around 35 per cent in ration costs compared with last year. This means that the average total cost of production will be up to 20 per cent higher, which equates to around 20p/kg or £15 a pig.
    
    

31. Continental pig producers face similar difficulties. In fact, the increase in UK prices has been less pronounced than in some other countries, as some continental harvests were more dramatically reduced than in the UK. But some -with arable enterprises - may see state aid benefits. Emergency aid has been offered to German and French producers affected by drought.
    
    

32. Within the EU, there are only feed futures markets in the United Kingdom and France. In other member states a lot of trading occurs on the physical spot markets, although of course many producers take out contracts for feed several months in advance. Estimates of increased costs to producers in other member states have been derived from the annual increases through to November in physical prices of feed wheat and feed barley (except in Denmark, where the annual increases to August are relevant). These have then been compared to the anticipated UK price increase.
    
    

    Figure 4: Estimated increases in costs of pig production
    
    
    

33. The increase in UK pig costs (20p/kg) is slightly below the average of these eight countries, of 22p. Pig costs have increased by more than in the UK in Spain, Italy and, in particular, France. German costs are estimated to have increased by roughly the same as in the UK although they are receiving special assistance. Danish cost increases have been below those of other countries, for reasons already discussed. However, there is likely to be some catching up in costs when producers renew annual contracts in mid-2004.

    Conclusions

34. A combination of shortages of cereals and proteins has pushed pig feed costs up considerably this year. Markets are likely to remain volatile over the next few months due to weather conditions and changing expectations of the 2004 harvest. The UK and European feed sectors have become increasingly exposed to world markets, so factors like potential Chinese demand could add to this volatility.
    
    

35. Feed accounts for around half of total costs. The higher prices of feed in Great Britain could add potentially around 20p/kg to the cost of producing a pig, taking the total cost from about 100p/kg to 120p. However, not all producers will face the same increases at the same time as much will depend on how much feed they have in store or how far ahead they have contracted to purchase feed.
    
    

36. The costs of pig production are rising throughout the EU, not just in the UK. All member states are having to pay higher protein and amino acid prices. Feed wheat and feed barley prices are also up everywhere with, in a number of cases, the growth in prices being more marked than in the UK due to more severe drought conditions. There are differences between member states in the popularity of buying feed forward, so the extent of exposure to higher feed costs so far will also vary. But eventually all producers will have to pay higher prices.
    
    

37. European cereal prices are highly influenced by market conditions elsewhere in the world. Spot prices in most of the major world exporting regions - North America, South America and Australia - have increased sharply since mid-year, although in general they remain similar to a year ago. The US futures markets indicate further increases in prices over the next few months. Of particular significance to the EU are the poor harvests and sharply higher prices in the Black Sea region.
    
    

38. It is imperative that some action is taken to lessen the impact of higher feed prices on European pig producers, especially as the current strength of the Euro against the US dollar is likely to have a negative effect on pig prices. Two options that should be seriously considered are increasing the tariff rate quota for feed wheat and reducing import duties. Tariff rate quotas were introduced last year due to the threat from cheap Black Sea grain undermining the EU market. Market conditions have since changed drastically and this threat currently no longer exists. An alternative approach would be a substantial reduction on all import duties for feed grains.
    
    

39. The EU Commission has a responsibility to manage the cereals market in a manner that prevents excessive price movements. Whatever policy options are taken, these need to be implemented as a matter of urgency.