What might rising oil prices mean for the livestock sector?
Significant oil price changes can have far reaching effects on agriculture both here in the UK and worldwide.
Crude oil prices have been on an upwards trend since June 2017. Since then, prices have increased by almost $29/barrel (+64%) reaching an average of $74.11/barrel during May, according to data from OPEC. The current quote is the highest since November 2014, which was during a six-month period in which the price dropped by 60%, after averaging over $100/barrel since early 2011.
Due to some strengthening of the pound against the dollar, the price in sterling terms recorded a slightly smaller increase over the past year. The price in sterling terms stood at £55.04/barrel in May, having increased by almost £20/barrel (+56%) since June 2017. This is still a noticeable increase in price.
Crude oil prices affect many direct input costs, but for pigs especially, the effects of higher oil prices on grain and oilseed prices will be particularly important. Feed costs represent over half of the cost of production, so this will have a greater impact on margins than higher energy costs.
There is a weak positive correlation between crude oil futures and UK wheat and Paris rapeseed nearby futures, reflecting the nature of commodity trading and use of oilseeds for biofuel production. Feed prices have indeed been rising in recent months. Nonetheless, improving physical performance mitigated the higher feed prices early this year, as improved feed conversion ratios enabled less feed to be fed to pigs without negatively affecting weight gain. Sows were also fed less, while performance continued to improve. This highlights how focusing on improving the efficiency and productivity of a business can make it more resilient to rising input costs.
Fuel and energy prices will, of course, also be impacted by movements in the crude oil market. Diesel prices are perhaps one of the more obvious input costs affected. Diesel prices (before tax and duties) generally correlate very closely with crude oil prices. Although, diesel prices did not decline as sharply as crude oil prices prior at the end of 2014.
Rising fuel prices may be putting some pressure on farm cash flows particularly for indoor pig units, due to higher building running costs. In the wider farming sector, running machinery and heating, lighting and drying crops would also have higher associated costs. According to Agrosoft data, energy makes up around 2% of total pig production costs; while this may not seem like a huge input, any rises could be the difference between a profit and loss when combined with rising costs in other areas.
The cost of transport can also have an impact on margins, both directly and indirectly. Directly, it can increase the difference between the price paid for farm outputs, and that which a farmer actually receives. The same principle would apply to farm inputs, with farmers needing to pay a higher price to receive the same volume of goods.
Looking forwards, recent developments in the oil market have been both bullish and bearish, meaning forecasts for oil price developments for the rest of the year and into 2019 are mixed. In recent weeks, oil prices have come under some downward pressure, but it remains to be seen whether this will continue. OPEC is meeting later this month to discuss relaxing production quota limits, which will be a key watch point for the market outlook.
Rebecca Oborne, Analyst
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