Terms of Trade Crop and Beef Production

Background and Objective

In recent years a significant increase in global agricultural commodity as well as input prices has been experienced – together with an increase in volatility. Against this background, the study aims to shed some light on the evolution of revenues, cost and margins in crop and beef production. More specifically, it will explore to what degree the increase in prices can be attributed to respective increases in cost and whether there is evidence that EU farms were affected differently than non-EU farms.

Approach

Analysis focused on the two product areas cash crop and beef. The reasons are a) the importance of crop production for European agriculture, b) the extent of border protection which is devoted to beef and c) both commodity areas are well developed within the agri benchmark Network.
In the cash crop analysis, the cost structures for typical agri benchmark farms are being used to generate a reference scenario for cost of production according to the prices for inputs which were in place in the period 2000 to 2003. For beef production, the time series of identical typical agri benchmark beef finishing farms were used to address the research questions.

Data and Methods

Data used are production and price statistics and data from typical farms of the agri benchmark Network for farm level.

Results

For crop production, analysis of the evolution of output prices and input prices fertiliser and energy during the period of 2000/2003 until 2010/2011 has led to the finding that all major input prices increased substantially more than output prices. The calculations yielded the following results:

1. Increases in prices for fertilisers and energy led to an increase in total cost of production – excluding land cost - of about 20 to 30 % in rapeseed and wheat.
2. Even though percentage wise the increase in input cost was significantly higher than the increase in output prices the net effect on farm profits was rather positive. This is because output prices for the two crops analysed went up by about 150 % while cost of production only increased by 20 to maximum 30 %.
3. Given the fact that increases in prices only is in the range of 30 % maximum it is rather unlikely that increasing cost have been the driver for increasing prices for outputs. Rather it has to be assumed that the price increase is demand driven.
4. There is no systematic interrelation between the location of the typical farm and the increase in cost of production. However, it seems that at least in wheat non-EU farms have been hit by cost increases more than EU farms.
5. Given the fact that profitability of arable production has gone up so strongly it can be concluded that mid-term a lower price level is very well possible. Of course the condition for such a development is a remarkable supply response towards the price incentives by the global agriculture.

In beef production, in all farms and countries considered, prices and costs went up in the period 2005 to 2010 considered. The following results were obtained:
Cost developments in non-European countries were more pronounced than in Europe. Cost increases were highest in Argentina, Brazil and China. The same applies to beef price increases in Argentina and Brazil. The historic cost gap between high cost and low cost countries is closing continuously. Reasons were a mix of exchange rates and local price increases resulting from overall demand due to positive economic development, rising grain, land and energy prices.