As poor starts to new years go it will be hard to match 2016. The relentless rain has made a gloomy time of the year even worse and, quite literally, washed away hopes for an early spring to reduce feed bills. However, the weather will eventually improve, but a greater concern is what will happen to agricultural markets in 2016. On that front the year also got off to a bad start.
The plunge in the Chinese stock market prompted fears of a new global recession. It was no surprise that the Global Dairy Trade (GDT) auction in New Zealand, the barometer of world prices, fell again, albeit by a modest 1.6%. This is not the start to the new year farmers wanted, and is further evidence that ways will have to be found to tackle volatility. This is now killing the agricultural industry world-wide, by making it impossible for businesses to plan. We have now ended up in a situation where prices are even more volatile than the weather – and with the only certainty CAP payments, which are declining.
What makes agricultural markets interesting is that they are the sum of millions of individual decisions. When consumers in China see the stock market plunge they feel poorer. When that happens they look away from costly imported food, and that has an immediate impact on all the countries that have seen China as an export market with limitless potential. That has an impact on global confidence, and the upturn in demand that farmers want for commodities evaporates. We then end up bumping along the bottom of the price curve.
The short boom followed by long bust cycle cannot continue for an industry that already has to deal with so many variables that are beyond its control. It’s a fair bet that this will be the subject of the moment this year, but there is no magic bullet policy out there to solve the problem. To be fair to the EU farm commissioner, Phil Hogan, he has recognised the problem with his ideas to make long-term financing for farmers more flexible. He wants to do this through the European Investment Bank, with a long repayment schedule linked annually to commodity prices.
That makes sense, but when the solution to tackle volatility emerges there will be a number of factors in the mix. These include a new drive for farmers to have firm contracts with processors. There is a growing sense that the days of farmers buying or planting and hoping for a profit need to change, and this is probably a big factor behind the growing interest in broiler poultry production.
Other factors in the mix to tackle volatility will include some form of price averaging mechanism to take the peak off boom prices, a better futures market for processors and perhaps farmers, plus some form of US-style price insurance mechanism.
There will be other ideas, but what Mr Hogan needs to do now is make tackling volatility a priority. A good first step would be to set up a high level group, or senior committee, to look at the options, with a timetable to report back before the Commission’s summer break in August. The autumn could then be devoted to getting some new mechanisms in place, before the mid-term review of the CAP in 2017.
The new six-month Dutch EU presidency set an initial debate on the CAP post 2020 as one of its priorities. It would be good if those discussions could secure agreement that greater stability should be the central driver of those reforms.