Global trends in food production could spell an end to the era of low food inflation but could be positive for Irish agriculture, writes Paul Kelly
While the recent foot-and-mouth disease outbreak in the UK grabbed the headlines, other developments that profoundly affect the supply and cost of food in domestic markets have not received similar attention. A surge in global agricultural commodity prices could mean that the era of stable food prices and low food inflation, which Irish consumers have enjoyed for many years, could soon come to an end.
Until last year, commodity prices had been falling steadily for 20 years due to a combination of reducing financial supports for agricultural production in the EU and US, and a growth in production from lower-cost countries, such as Brazil and New Zealand.
The continuing World Trade Organisation discussions, the so-called Doha round, were expected to reinforce this trend of downward price pressure. However, the failure to agree a new trade deal along with fundamental changes in both the supply of and demand for agricultural commodities is leading many experts to predict the opposite.
The OECD-FAO Agricultural Outlook 2007-2016 states that, "temporary factors such as droughts in wheat-growing regions and low stocks explain in large measure the recent hikes in farm commodity prices. But when the focus turns to the longer term, structural changes are under way which could well maintain relatively high prices for many agricultural products over the coming decade."
While the causes of these changes are diverse, they are interlinked. Most meat and milk production is based on grain inputs, with grass-fed production being confined to a small number of countries, such as Ireland and New Zealand. Up to 85 per cent of the cost of producing pork or chicken relates to the cost of grain as feed input, for example.
High grain prices, therefore, impact on prices right across the food sector. In addition, climate change policies and the sustained rise in energy prices over the last two years has led the US and the EU to introduce new policies and funding support to encourage biofuel production.
This has led the US government to increase its target under the 2005 Renewable Fuels Act from 7.5 billion gallons of renewable fuels used in gasoline by 2012, to 35 billion gallons in 2017. About 40 per cent of the 2007 maize harvest in the US will be sold as fuel rather than as food/feed input.
This new demand stream for grain has coincided with drought-related falls in output of grain and dairy products, particularly in Australia, where they have had a sustained drought for almost six years now. Australian grain output fell by 20 million tonnes in 2006 or almost half of normal production. Australian milk production has also been dramatically affected, with milk output in 2007 expected to be only 60 per cent of the 2001 level.
At a time when supply is already under pressure, demand for dairy products and ingredients in China and India is accelerating rapidly. The net effect of all this is that over the last 12 months global corn prices have increased by 60 per cent and wheat prices by 50 per cent. This year has also seen a doubling of world market prices for some dairy ingredients.
The EU Commission has predicted "a boom era for commodity prices", and has indicated that the existing market structure is about to be replaced by a "new food price paradigm". So what does this mean for Ireland?
Ireland's food and drink industry provides a significant embedded economic contribution to the Irish economy with economic activity linked to the sector estimated to be the equivalent of 35-40 per cent of value added in Irish manufacturing. Irish exports of food and drink products to almost 120 countries worldwide were valued at €8 billion in 2006.
As a major food-exporting country, with a largely grass-based production system, the prospect of a sustained increase in the value of food products is a major plus for the Irish economy.
The fact that this potential surge in the output value of the sector is coming at a time when there is a concern that the recent boom in property and construction is at an end is very welcome and should improve the overall prospects for the Irish economy in the coming years.
For consumers, however, the days of stable food prices may well be over.
Ireland's growing prosperity has seen spending on food drop from almost 23 per cent of personal consumption to less than 12 per cent over the last 10 years. We have also benefited from high levels of competition that have kept food inflation at less than a third of general inflation over the last six years. But there has been a structural change in the market, the supply of food is now inextricably linked to our energy requirements, in terms of competition for scarce resources and hence price.
Food inflation is now running at just under 5 per cent in the UK and over the first half of the year food price inflation in the US was 6.2 per cent on an annualised basis. It is unlikely that we will remain immune from global movements in the price of food commodities and hence inflationary pressures.
• Paul Kelly is the director of Food and Drink Industry Ireland, a division of Ibec