1. Rural Economy Research Centre Situation and Outlook Conference Inputs market Trevor Donnellan, Rural Economy Research Centre (RERC) Teagasc, Athenry, Co. Galway Tullamore, December 9 th 2008

2. Rural Economy Research Centre Situation and Outlook Conference Overview  Some background  A quick word on interpreting price changes  Look at price and quantity story in 2007/2008 Feed Energy markets Fertiliser Electricity Fuel Labour  Prospects for 2009  Summary

3. Rural Economy Research Centre Situation and Outlook Conference Two types of price changes  How much have prices changed in 2008 ?  Type 1: Annual price changes the changes in average annual prices year on year  Type 2: Changes in prices over the course of a year i.e. changes in price from January to December  The difference may seem obvious (and it is!) But quoted prices changes are often of the second type Can be misleading if you want to analyse annual performance

4. Rural Economy Research Centre Situation and Outlook Conference Lies, Damn lies….. Price change 2008/2007 = 0% Price change Jan 2008 to Dec 2008 = 66%

5. Rural Economy Research Centre Situation and Outlook Conference Review of 2007 and 2008

6. Rural Economy Research Centre Situation and Outlook Conference Dairy and Beef Feed Usage Source: FAPRI-Ireland 2008 feed purchases: Dairy - up about 6 % on 2007 Beef – up about 5% on 2007

7. Rural Economy Research Centre Situation and Outlook Conference Feed Prices: 2006 to present Source: CSO Average prices per tonne in 2007 - €246 in 2008 - €285 Approx 15% price rise (2008 v 2007) € 210 € 290

8. Rural Economy Research Centre Situation and Outlook Conference Feed prices 2008  Factors now pushing feed prices downward Increased planting rates improved harvests weaker demand growth  High level of cereal prices in 2007 locks in high feed prices in 2008  Cereal prices drop will take time to work itself through to the feed market  Feed bill for 2008 will be at record levels

9. Rural Economy Research Centre Situation and Outlook Conference Weekly Euro US dollar exchange rate 2007 and 2008 Source: St Louis Fed Strong appreciation in late 2007 through to July 2008 Sharp decline in recent months

10. Rural Economy Research Centre Situation and Outlook Conference Brent Crude price 2007 and 2008 Source: St Louis Fed 2007: $72 €52 2008: $106 €70 Annual dollar increase: 46% Annual euro increase: 33% Fuel costs in Ireland up 25 %

11. Rural Economy Research Centre Situation and Outlook Conference Fertiliser 2008  Pasture and forage costs Major item: about 18 % of total production costs (dairy and beef) 50:50 Contractor costs and Fertiliser purchases  Contractor Costs: Up 20% Rising fuel and plastics prices  Fertiliser prices: Strong upward trend (more in a moment) Strong fertiliser demand Increased energy prices, in particular the price of natural gas Changes in the fertiliser export tax in China

12. Rural Economy Research Centre Situation and Outlook Conference Fertiliser Manufacters’ Prices Source: Yara Brazil, India and Thailand: Urea demand stronger in 2008 China: cut in export tax from Dec 2008 to end of 2009 Urea up 58% CAN up 77% 2007: Urea €224 CAN €178 2008: Urea €353 CAN €315

13. Rural Economy Research Centre Situation and Outlook Conference Electricity and fuel 2007 and 2008  Demand for electricity and fuel tends to be relatively inelastic usage in 2008 will be on a par with the 2007 level  Irish Electricity prices regulated (change infrequently) price rose 17.5 % in August 2008  But average 2008 electricity price same as 2007 level Electricity prices higher in early 2007 than in early 2008  Fuel prices up 20% in 2008 on the 2007 level  Overall expenditure on energy and fuel up 13 % on dairy farms in 2008 up 20 % on beef farms in 2008

14. Rural Economy Research Centre Situation and Outlook Conference Labour & Other costs in 2007 and 2008  Quantity of labour and other costs is relatively price inelastic Volume likely to change little year on year  Labour costs: up by 6 % in 2008 (relative to 2007)  Other input items: up by 6 % in 2008 (relative to 2007)

15. Rural Economy Research Centre Situation and Outlook Conference Looking ahead to 2009

16. Rural Economy Research Centre Situation and Outlook Conference Feed in 2009  Feed usage: Weather conditions have a strong impact not possible to predict weather in 2009 dairy feed: volumes revert to average of last five years beef feed: unchanged on 2008 level  Cereal Prices: 2008 harvest prices down 30 % on 2007  Feed Prices: Price drop of 15 to 20 % on 2008 level

17. Rural Economy Research Centre Situation and Outlook Conference Crude Oil in 2009  Futures market as of November 2008 crude oil futures price on average for 2009 is about $55 pb about €44 pb (at current exchange rates - $1.25/euro)  Average crude oil price in 2009 ? in the range of $50 to $60 ? a decrease in the range of 30 to 40 % on the 2008 level (at current exchange rates)

18. Rural Economy Research Centre Situation and Outlook Conference Fertiliser in 2009  Weaker demand: pulling down fertiliser prices falling energy prices falling commodity prices credit problems for farmers  Urea prices down 20 to 40 % on the 2008 level would put urea prices back to 2007 average levels  Downward adjustment in CAN price can be expected Reduce fertiliser bill by switching away from CAN to urea  P & K: Demand to remain strong P & K prices are unlikely to fall

19. Rural Economy Research Centre Situation and Outlook Conference Energy (Electricity & Fuel) in 2009  Electricity prices lag changes in international energy prices  ESB request for another price increase denied But decrease in electricity prices is unlikely in the short term.  In 2009 prices will be unchanged on 2008 level Substantial reduction in price necessary in 2009 to push prices below 2008 level  However, with falling oil price - fuel prices should drop by 20%

20. Rural Economy Research Centre Situation and Outlook Conference Labour costs & general inflation in 2009  Labour costs to rise by 2 to 3 % Economic downturn to continue into 2009 Unemployment rate rising to 10% in Ireland Dampens wage expectations  Inflation rate to fall to 2 % Sizable reductions in price of major inflation items, such as fuel, food, mortgage interest

21. Rural Economy Research Centre Situation and Outlook Conference Summary  Expenditure on many cost items rose sharply in 2008  Price increases were the main reason for increased expenditure  Considerable cost reductions likely in 2009 Mainly due to lower prices  But some output prices also dropping  Not possible to generalise on the impact on margins in 2009 as outcomes are sector specific

22. Rural Economy Research Centre Situation and Outlook Conference Thank you Papers available from www.tnet.teagasc.ie/rerc