Pressure on Agricultural Incomes likely in 2009

Agricultural income in Ireland is likely to decrease in 2009 according to a report released by Teagasc economists Trevor Donnellan and Kevin Hanrahan today, Monday, 29 September.

In 2008 high commodity prices, an increase in the milk quota and the introduction of the Suckler Cow Welfare Scheme will mean that broadly speaking, farmers will not see a dramatic reduction on the record income level in 2007, even though input prices for feed and fertiliser have risen considerably.

However, there is a mixed bag of prospects across the commodity sectors for 2009. To date there is little sign that any of the main input items, feed, fertiliser and fuel, will drop in price, while it is less clear that some output prices can hold up at 2008 levels.

Dairy commodity prices have dropped considerably in recent months and this has put downward pressure on the price paid for milk. Even if dairy commodity prices hold at their current levels into 2009, taking account of the seasonality in production, milk prices for 2009 will be down considerably on the 2008 and 2007 levels. This will give rise to tighter dairy farm margins than in 2007 or 2008, although incomes should still be ahead of the 2006 level.

Irish beef prices have increased considerably in 2008, due to the effective ban on Brazilian beef imports in the EU. It would appear that the absence of Brazilian beef from the EU market is set to continue into 2009, and in the short term this will support EU and Irish cattle prices at levels close to those in 2008. In the medium term the restoration of South American beef imports into the EU would put downward pressure on Irish beef prices and, given the outlook for higher input costs, lead to reduced margins for beef farmers.

For Irish grain producers conditions in 2008 have been very difficult due to poor weather during the harvesting period. Despite the large increase in grain area planted in 2008, and the prices for grain well in excess of prices achieved a few years ago, the poor harvest will put a dent in 2008 margins. More favourable weather in 2009 would see margins rise on cereal farms since grain prices are expected to remain high.

FAPRI Ireland Study Highlights Impact of WTO Reform Proposals

The World Trade Organisation (WTO) negotiations are currently on ice but Teagasc economists have warned that it would be a mistake to think that agricultural trade reform is completely off the agenda. A new Teagasc study on the impact of WTO on Irish Agriculture was published today, Monday 29 September.

Teagasc economist Kevin Hanrahan said that while some agricultural sectors would not be significantly affected by a WTO agreement, it would still have significant negative consequences for agricultural income in Ireland. The drop in farm incomes would be caused mainly by the decrease in beef prices and production that would occur as a result of increased imports of beef into the EU.

One of the objectives of the WTO negotiations is to reduce barriers to trade by reducing import taxes, otherwise known as import tariffs. This is the most serious proposal for the Irish beef sector as import tariffs offer protection from competition from lower priced beef from outside the EU.

Trevor Donnellan of Teagasc said that, in contrast to beef, EU prices for most dairy and cereal commodities are now quite close to international price levels. This means that reducing the level of import tariffs would still leave commodities produced outside the EU uncompetitive in price terms on the EU market.

To address the vulnerability of the EU beef sector to increased imports, EU negotiators have stated that they will ensure that beef is made a sensitive product. This could limit the reduction in beef tariffs to 23 percent, considerably lower than the likely 70 percent general reduction proposed.

Even with sensitive product status for beef, imports into the EU are projected to increase by 30 percent and consequently Irish beef prices and output are projected to fall. This would result in a loss of €120 million per year for Irish beef farmers. Without sensitive product status the report finds that the loss to Irish beef farmers would be much greater amounting to almost €400 million per year.

Overall, depending on whether or not beef is given sensitive product status, the drop in agricultural output value across all sectors could amount to between €180 million and €450 million per year.

There would also be knock on consequences for other parts of the economy that are dependent on agriculture. Irish agriculture is highly integrated with the rest of the economy. Compared to other sectors of the economy a greater proportion of the expenditure by farmers in Ireland is on domestically produced goods and services. This means that the total loss of €100 million worth of agricultural output is greater than the loss of an equivalent amount of output from most other sectors of the economy.

Negative Impact on Beef from WTO Proposals

The difficulties which the Irish beef sector could face under World Trade Organisation (WTO) agreement were highlighted in the report. Increases in beef imports are set to put pressure on beef prices and beef production.

At the centre of the current WTO negotiations is the degree to which tariffs on the imports of agricultural goods into the EU will be cut. The reduction in the tariffs is likely to be 70 percent in the event of an agreement being reached. However, the EU can, for a limited numbers of commodities, chose to reduce the tariff reduction required to 23.3 percent. However, as a concession for this so-called sensitive product designation, an increase in imports at low or zero tariffs is required. These are what are called tariff rate quotas or TRQ. The EU Agriculture Commissioner Marian Fischer Boel has stated that beef will be designated as sensitive in any agreement reached.

In new research undertaken by Teagasc economists Trevor Donnellan and Kevin Hanrahan, the impact of a WTO scenario where beef is designated as sensitive and an alternative WTO scenario where no agricultural commodity is designated as sensitive have been analysed. The impact of the beef sector differs between the two scenarios indicating that the lower tariff reduction in the scenario where beef is designated as sensitive (23 percent versus 70 percent) would be important in terms of the impact of a reform on Ireland’s beef sector.

The FAPRI-Ireland report has found that the value of output from the Irish beef sector declines by €120 million (or 8 percent) per year with beef designated as a sensitive product. With the 23 percent reduction in tariffs imports of beef into the EU increase by 30 percent. The increase in imports leads to a 9 percent decline in Irish cattle prices.

In the absence of a WTO agreement EU beef import are likely to grow strongly over the next 10 years. EU imports of beef without a WTO agreement will be in excess of the volume of tariff rate quota access that could be granted to non-EU countries in the event of a WTO agreement.

Kevin Hanrahan stated that if beef were not designated as being sensitive, the magnitude of the negative impact on Irish agriculture is likely to be much larger. He said that if beef tariffs were cut by 70 percent, the resulting surge in imports of beef into the EU would dramatically lower Irish beef prices. By 2017 Irish beef prices would decline by over 28 percent, and the value of the beef sector’s output would fall by € 380 million per annum.

The ongoing difficulties faced by the Irish beef sector are highlighted by the fact that a significant contraction in suckler beef production is likely to occur even if a WTO agreement does not occur.

Irish Dairy Sector to escape major impact of WTO agreement

WTO reform would be unlikely to have a major impact on the Irish dairy sector. On the one hand the outlook for dairy commodity prices is relatively positive, while on the other hand EU expenditure on export refunds is in decline. Together these factors mean that the impact of WTO on the Irish dairy sector will be considerably lower than might have been considered possible earlier in the decade.

Overall, the report considers that the impact of WTO reform on Irish milk prices could amount to a reduction in milk prices of less than 5 percent.

Historically export refunds have been quite important to the EU dairy sector since EU dairy prices were well above the prices available to exporters on the world market. According to Teagasc Economist, Trevor Donnellan, market circumstances have now changed considerably. Higher dairy commodity prices have reduced the gap between EU prices and prices on the world market and now put a floor on the level to which EU dairy commodity and milk prices could fall to in the coming years.

In the dairy sector the main impact of WTO reform would be felt through the loss of export refunds for dairy products. This would mean that the intervention support price for butter in the EU would need to decrease and lower EU butter prices would result.

In advance of any WTO deal, the European Commission has already set about reducing its expenditure on dairy export refunds and is committed to eliminating them by 2013. Kevin Hanrahan of Teagasc said that, in effect the European Commission is implementing some aspects of the possible WTO agreement of its own accord.

The other main change to trade policy which a WTO agreement would bring about is a reduction in import tariffs. The report finds that, even with a substantial reduction in the import taxes levied on dairy products, the volume of these imports is unlikely to increase substantially. Even with a 70 percent reduction in dairy import tariffs, the combined impact of high dairy prices and the high level of the current tariffs, would mean that dairy products from outside the EU would be uncompetitive in price terms.