The far-reaching effects of low oil prices on agriculture
The fall in nearby Brent crude oil futures to under $50/barrel, from over $115/barrel in mid-June, is likely to have far reaching effects on agriculture both in the UK and worldwide.
Despite currency movements, crude oil prices in sterling terms have also lost over half their value since June. This has come on the back of strong increases in world oil production. Oil prices affect farmers’ margins through links with both input and, to a lesser extent, output prices. On top of this, the potential effects on the wider global economy could be noticeable and, if it is an indicator of slowing global growth, could mean a slower pace of growth for agricultural products, including pig meat. On average, however, and for the UK and Europe particularly, lower oil prices themselves are expected to benefit economic growth.
For livestock sectors, the effects of lower oil prices on grain and oilseed prices have a significant influence on feed costs, which represent over half the cost of production. It is through this channel that lower oil prices will have a greater impact on margins, rather than through lower energy costs. However, while it is straightforward to assume that oil-induced movements in grain prices will mean lower feed prices, the impact from oilseeds is more complex. If increasing liquid fuel consumption supports the demand side of the vegetable oil market, due to biofuel mandates, the incentive to crush oilseeds would be supported. All other things being equal, this would increase oil meal supply, putting downward pressure on the price of these key feed ingredients.
To read more about how the fall in oil prices may influence agricultural markets, click here.