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2012 Outlook for Irish Cereals Sector

30 January 2012

Harvest prices in the cereals sector in 2011 were higher than in 2010, according to F.S. Thorne from Teagasc's Agricultural Economics and Farm Surveys Department in his outlook for cereals in 2011/12.

Introduction

The relatively high prices received at farm level in 2010 were repeated again at harvest 2011, coupled with above average yields. There was however a number of factors, which resulted in some cost price pressure for tillage farmers in 2011.

The upward movements of prices since mid 2010 was associated with several factors, the most important of which was a decrease in the production estimates for crops in key producing countries, which resulted in a draw down of stocks and tighter global supply and demand balances in 2010/11.

This paper will consider whether the price increases of the 2011 harvest can be considered atypical or whether prices will continue at elevated levels into the 2012 harvest. The costs of production on tillage farms in Ireland will also be considered to arrive at an estimate of tillage enterprise profit for 2011 and a forecast for 2012. This paper uses Irish National Farm Survey (NFS) data to conduct a review of the financial performance of tillage farms in 2010. Following this, price and costs are estimated for 2011 to produce an estimate of profit for the 2011 harvest year. In the concluding sections of the paper, the outlook for 2012 is presented.

Review of the Economic Performance of Tillage Farms in 2010

Approximately 6,500 mainly tillage farms were represented by the NFS in 2010. Income on these farms increased by 141 percent from 2009 to 2010, but it is important to note that this is on the back of a very poor year in 2009. Market based gross output increased by 55 percent in 2010. Yields per hectare increased by on average 5 percent while the price per tonne increased by over 50 percent. Input expenditure increased by about 10 percent. These changes resulted in an average family farm income (FFI) in 2010 of €36,759 which is equivalent to a 40 percent increase on the average of the previous four years.

Figure 1: FFI on Specialist Tillage Farms in Ireland: 2006 to 2010

To understand the economic performance of tillage farms in 2010, we begin with a review of the cost and return structure of the main cereal crops using NFS data. Figure 2 disaggregates the direct costs of production for cereal crops in 2010.

Figure 2: Composition of Direct Costs for Irish Cereal Crops, 2010

Figure 2 shows that in general, direct costs are higher in winter sown crops compared to spring sown crops, which is due to higher fertiliser and crop protection costs in winter crops. However, given that yields are generally higher in winter sown crops the more appropriate comparative economic indicator is gross margin which is shown in Figure 3.

Figure 3: Gross Margins per ha for Irish Cereal Crops, 2010

Figure 3 shows that the average gross margin per hectare for all winter crops is generally higher than the gross margin for spring sown crops. Winter wheat recorded the highest margin of all crops in 2010, closely followed by Winter barley and Winter oats (see Table A1 for further detail). The gross margin for all cereal crops was significantly higher in 2010 compared to 2009 or the average of the previous 5 years. The gross margin for Winter wheat and Spring barley in 2010 was 38 percent and 78 percent higher than the previous five year average respectively. While gross margin estimates are useful for comparative purposes, it is also worthwhile to examine the shift in net margin over time. However for cereal crops it is difficult to allocate overhead costs and straw output to individual crops within the NFS. For this reason, net margin of the entire specialist tillage farming population within the NFS is examined, shown in Figure 4 below.

Figure 4: Cereal Enterprise on Specialist Tillage System Farms: Net Margin Distributions, 2010

To examine the variation in margin that exists on tillage farms, the sample which was weighted to represent the population of 6,500 specialist tillage farms, was classified into three groups. Farms were classified on the basis of net margins; the best performing one third of farms are labelled high margin, the middle one third are moderate margin and the poorest performing one third of tillage farms are classified as low margin. The variation in margins across farms is apparent from Figure 4. The net margin for the cereal enterprise per hectare on high margin farms in 2010 was €430 per hectare compared to €118 on moderate margin farms and €158 per hectare on low margin farms. It is important to remember that these margins include production output only; hence by definition the Single Farm Payment (SFP), which is decoupled from production, is not included in these figures.

Estimated Review of 2011 Performance

This section of the paper presents a review of the cereal sector in 2011. To provide an estimate of enterprise profitability for the current year, it is necessary to estimate the volume and price of inputs that are likely to have been used as well the volume and value of outputs. The ensuing sections of the paper discuss first, the movements in input prices and usage in 2011 and second, the cereal market conditions, harvest yields, and production in 2011.

Estimated Input Usage and Price 2011

Fertiliser - Usage and Price 2011

In the early half of the last decade fertiliser costs typically comprised about 25 percent of direct costs and just over 10 percent of total costs on tillage farms. However, as illustrated in Figure 5, fertiliser types commonly used on tillage farms have increased substantially in price since 2005, with a very considerable increase occurring during 2008 and 2009. The Central Statistics Office (CSO) recorded price in 2008 for P&K and straight nitrogen fertilisers were approximately 125 percent and 75 percent higher than 2005 levels respectively. Increased energy prices, in particular the price of natural gas which is a key determinant of fertiliser price, was the major driving force behind the upward trend for fertiliser prices throughout the 2000s. Increased demand and relatively fixed production capacity was also a factor. However, following the peak in 2008 and 2009, the pressure on fertiliser prices eased somewhat for the 2010 harvest year, but upward pressure on fertiliser prices was again witnessed in the 2010/11 harvest year. In the 2010/11 harvest year it is estimated that straight nitrogen products and P&K products increased by between 25 and 30 percent over 2010 prices. It is important to note however, that these prices are still below the prices recorded in the peak period of 2008 and 2009. However, the monthly price statistics for the third and later quarter of 2011 once again shows an upward movement in straight nitrogen and compound fertilisers which will have an effect on fertiliser prices for the 2012 harvest year.

The pattern of fertiliser purchases on cereal farms is somewhat different from that of grassland farms, with application been spread throughout the sowing and growing season from September of one year to May or June in the following year, depending on whether the crop is Spring or Winter sown. On this basis, It is estimated that the fertiliser prices for cereal crops were up by approximately 15 to 25 percent in 2011 compared to 2010 depending on whether the crop was Winter or Spring sown.

On the usage side, DAFM figures indicate that fertiliser purchases in the 2011 fertiliser year (October 2010/September 2011) decreased for all three elements, with N down approximately 5 percent and P&K down between 2 and 3 percent. However, when seasonality of purchases is taken into consideration for cereal farms, the overall sales of fertiliser in the first quarter of 2011 were up approx. 10 percent on the same period in 2010. This overall increase in fertiliser usage on crop farms in 2011 can be attributed to relative price movements in cereals in first half of 2011 compared to cereal price movements in the same period in 2010.

Figure 5: Irish Farm Gate Price Index of Fertilisers 2005 to 2011

Given that the DAFM figure on fertiliser purchases refers to all fertiliser purchases for grassland and cropland it was necessary to consult reports from farm advisors and industry sources to evaluate the change in fertiliser usage levels for crop farms. Reports from a number of sources seem to indicate that fertiliser usage per hectare in 2011 was up by about 10 percent on 2010 levels. However, overall usage on crop farms may not be suggestive of this decrease given the increase in crop area between 2010 and 2011. However in per hectare terms it is assumed that for 2011 usage was up approximately 10 percent. The increase in fertiliser usage on crop farms coupled with the increase in fertiliser prices experienced in 2011 leaves overall expenditure per hectare on fertiliser up in 2011 on the 2010 levels.

Seed - Usage and Price 2011

Purchased seed on crop farms is a less important input in expenditure terms in cereal production, comprising between 10 and 15 percent of direct costs for cereal production and just under 11 percent on average on all tillage farms in 2010. In terms of the composition of total costs, seed represented just over 5 percent of total costs in 2010. In 2011, cereal farmers experienced a considerable increase in seed costs relative to the previous year due to the significant upward movement in the cereal prices. In autumn 2010 when seed supplies were purchased for the 2011 harvested winter crops, blue label seed cost increased by approximately percent, from €410 per tonne in 2009 to €460 per tonne in 2010. This cost increase was also evident in 2011 for spring sown crops relative to the 2010 sown spring crops.

Crop Protection - Usage and Price 2011

The expenditure on crop protection by specialist tillage farms in 2010 accounted for 23 percent of direct costs and 11 percent of total costs. However the contribution of crop protection to the composition of costs can vary significantly depending on the crop, with the percentage spend on winter crops higher than on spring crops. For example on the winter wheat crop in 2010, crop protection costs accounted for 34 percent of direct costs, compared to 26 percent for Spring Barley.

Compared to other significant costs on tillage farms, the increase in costs of crop protection has been limited over the recent past. Figure 6 shows the increase in costs of crop protection products from 2005 to 2011 was under 5 percent and the costs between 2010 and 2011 are estimated to have decreased slightly by about 2 percent. However this decrease in prices is not reflective of the introduction of new chemistry to the cereals market in 2012. To reflect the inflationary pressure associated with this new chemistry a static price inflation between 2010 and 2011 is assumed. Volume changes between 2010 and 2011 are estimated to be negligible.

Figure 6: Price Index of Plant Protection Products in Ireland 2005 - 2011

Energy and Fuel - Usage and Price 2011

Energy and fuel are important inputs in crop production. Given that a number of direct costs and overhead costs are directly influenced by energy and fuel prices the trend in energy prices is of significant importance for the average tillage farmer. In this analysis it is assumed that hired machinery and transport costs which are a component of direct costs and machinery operating expenses which are a component of overhead costs are directly influenced by energy inflation. These cost items represented just under 25 percent of total costs on tillage farms in 2010.

Based on the CSO estimates presented in Figure 7, the farm level price of fuel has increased by just over 40 percent between 2005 and 2011. The significant increase in prices which occurred between 2007 and 2008 was offset by a brief reprieve between 2008 and 2009 before prices again continued to rise from 2009 onwards. Between 2010 and 2011 as a result of rising crude oil prices, a weakening of the euro against the US dollar and further carbon tax rate increases, fuel costs in Ireland increased significantly (by approximately 17 percent on a calendar year basis). This estimation is based on a comparison of the motor fuel index from the CSO for 2010 and the first ten months of 2011. For winter and spring sown crops the increase in energy prices is estimated at just under 20 percent. The differential between the calendar year price increase and the assumed price increase for cereal crops is due to the seasonality of purchases. Demand for these input items tends to be relatively inelastic with respect to price and therefore it is assumed that usage in 2011 will be on a par with the 2010 level. Overall expenditure on fuel related items is likely to be 20 percent higher in 2011 relative to 2010.

Figure 7: Price Index of Fuel Products in Ireland 2005 - 2011

All other direct and overhead costs - Usage and Price 2011

Based on CSO estimates for the first ten months of 2011 compared to the same time period in 2010 it is assumed that labour costs and agricultural 'other costs' within agriculture increased by approximately 1 percent in 2011 relative to 2010.

The average cost of land rental in 2010 on specialist tillage farms was just over 8 percent of total costs. Given that farm gate cereal prices increased significantly in 2010 there was a consequent increase in land rental prices. It is estimated that land rental prices increased by approximately 10 percent in 2011 relative to 2010. This estimate is based on observing historic NFS data on land rental prices and the relationship with cereal prices. While the convention is to assume that land rental prices react strongly to changes in cereal prices the data from the NFS indicates that cereal price inflation is not translated in its entirety to land rental charges. Hence, despite a significant increase in cereal prices in 2010, it is assumed that the average land rental agreement was increased by only 10 percent.

Estimate of Total Input expenditure for 2011

Total expenditure on all input items is estimated to have increased in 2011 relative to 2010. The most significant increase in expenditure occurred with fertiliser, which is estimated to have increased by between 25 and 30 percent between 2010 and 2011, taking into account estimated volume and value changes. On average, the increase in total direct costs was approximately 13 percent in 2011 relative to the 2010 level.

Figure 8A: Direct Costs on Cereal Production in Ireland 2010 and Estimates for 2011(Winter Crops)



Figure 8B: Direct Costs on Cereal Production in Ireland 2010 and Estimates for 2011 (Spring Crops)

Estimated Output Values 2011

Price, yield and moisture levels in 2011

Unprecedented volatility has been witnessed in cereal prices in Ireland since 2006, with prices reaching a historical high in nominal terms in 2007, followed by a significant drop in prices in 2008 and again in 2009. In 2010 farm gate cereal prices increased significantly but did not reach the levels seen in 2007. In 2011 farm gate cereal prices increased again over those witnessed in 2010. Figure 9 below shows that farm gate feed wheat, barley and oat prices at 20 percent moisture (paid at harvest time) were up between 6 and 7 percent in 2011 relative to 2010. This price represents approximately a 30 percent increase on the previous three year average. The biggest price increase for cereals at harvest 2011 was evident for the malting barley crop with an increase of approximately 25 per cent.

Figure 9: Farm Gate Irish Cereal Prices, 2000-2011

While the majority of cereals in Ireland are still sold off farm at harvest time to a grain merchant on a green moisture basis, the ability of farmers to forward sell grain has introduced an additional complication to the calculation of the average price received by farmers. A special survey conducted by the NFS in 2011 examined the proportion of the 2011 cereal harvest which was forward sold. This research indicated that approximately 25 percent of total cereal production in 2011 was forward sold by farmers. To account for this new departure in the mechanism of selling cereals off farm it was important to observe historic futures prices between key dates to estimate forward sales prices. This futures data (adjusted to take account of drying charges, exchange rates and transport charges) was used in addition to the green price at harvest as outlined in Figure 9 above to calculate a weighted average price of grain sold green at harvest time (75 percent weighting) and forward sold grain (25 percent weighting). Using this method of calculation a price increase of 11 percent was observed between 2011 relative to 2010 for feed wheat and barley, compared to the 6 and 7 percent increase which was calculated when green prices at harvest time were examined in isolation from forward selling arrangements.

Given that the final farm gate cereal price is based on moisture differences above and below 20 percent, it is also important to consider the weather at harvest in 2011. Table 1 shows that the favourable conditions at harvest in 2011 resulted in moisture contents for all cereal crops below average levels recorded in recent years.

The last variable which must be considered when output value is estimated is yield per hectare. Table 1 shows the average green yields obtained in 2010 and 2011. In general for the 2011 harvested crops, sowing conditions for winter and spring crops were good. The weather conditions during the growing season were also very favourable with dry sunny weather in the Summer months having a positive impact on grain fill. Hence, on average crop yields in 2011 were described as well above "average". However, it must be remembered that these yields are green yields and not adjusted for moisture content.

Estimate of Total Output Value for 2011

Total output value per hectare for all cereal crops is estimated to have increased quite considerably in 2011 relative to 2010. Output was up on average 22 percent on 2010 levels.

Figure 10: Actual Gross Output per Hectare 2010 & Estimated Gross Output per Hectare 2011

Estimate of Total Production 2011

The figures presented in section 3.2.2 illustrate output value per hectare. However these estimates do not take into consideration the increase in area devoted to cereal crops in 2011. Figure 11 shows the area estimates for 2011 based on CSO estimates.

Figure 11 shows that the total area devoted to cereal production increased by 9 percent in the 2010/11 crop year compared to the 2009/10 crop year. The largest percentage increase in area was witnessed in spring oats, where total area devoted to the crop increased by 30 percent year on year, however this was increase was mainly due to a significant decline in winter oats area planted. Total wheat area increased by 20 percent and barley increased by a mere 3 percent. Total area planted to oats increased by 7 percent.

Figure 11: Change in Irish Crop Area from 2009/10 to 2010/11 Crop Year in Ireland

Table 2 combines actual total cereal production for 2010 as reported by the CSO with estimated total cereal production for 2011. The estimated 2011 production of wheat, barley and oats is based on 2011 yield estimates from the Teagasc harvest report and CSO statistics for the 2011 area planted. Overall cereal production is estimated to be up 457, 000 tonnes or 22 percent on 2010 levels.

International Production Estimates for 2011

While production estimates for Irish cereals are important from a national supply, demand and balance sheet perspective, it is primarily developments in the international supply and use balance for cereals that affects price development. For this reason a review of the international end stocks for cereals is more informative when price developments for the coming harvest year is been estimated. The latest edition of Strategie Grains (December 2011) estimates that the total production of grains within the EU for the marketing year 2011/12 was 284 million tonnes, with 2.3 million tonnes of carry out stocks. Carry out stocks are more or less the same in the current marketing year as the previous within the EU. The IGC estimates (Straregie Grains, December 2011) shows that global wheat production for 2011/12 to be up on the previous year but ending stock supply to use ratio to remain slightly behind the situation at the end of 2010/2011. The world maize situation however appears to be in a ‘heavier’ forecast position for year end with ending stocks forecast up on the previous year and the carry out stock to use ratio slightly higher than the previous year. The world barley year end forecast is for a decrease in ending stock volume but for no change in the stock to use ratio, which is similar to 2010/11 at 21 percent.

Review of Tillage Enterprise Margins in 2011

The review of cereal output value showed that the average value of output received by farmers across all cereal crops was approximately 20 percent higher than the average in 2010, while the review of input costs concluded that total direct costs were approximately 13 percent higher in 2011 than 2010. Figure 12 presents the effect on gross margin for each of the main cereal crops.

Figure 12: Actual Gross Margin in 2010 & Estimated Gross Margin for 2011 for each of the Main Cereal Crops

Figure 12 shows an increase in gross margin for all cereal crops in 2011 relative to 2010 due to the increase in output value coupled with a less severe increase in direct costs. For example, the gross margin for winter wheat is estimated to be up by approximately €320 per hectare, while the gross margin for spring barley is estimated to be up by approximately €170 per hectare on the 2010 level. It should be noted that the average gross margin figures presented above are market based gross margins and therefore exclude all decoupled payments.

Similar to the format used to present margins for 2010 earlier in the paper, the estimated net margins for 2011 are presented for the cereal enterprise on specialist tillage farms, as well as the population disaggregated into onethird groupings based on margins obtained.

Figure 13 shows the cereal enterprise net margin estimates for 2011 relative to 2010, for the average of the specialist tillage farming population, in addition to the margins for the disaggregated population.

Figure 13: Actual Net Margin 2010 and Estimated Net Margin for 2011 for the Cereal Enterprise on Specialist Tillage Farms

The estimate for net margin in 2011 shows a significant improvement over the margins obtained in 2010. For the best performing one-third of tillage farmers the estimated net margin for 2011 was €595 per hectare, and for the average farmer was €270 per hectare. It is important to remember that these figures exclude the SFP.

Outlook for 2012

In this section forecasts are provided on the expenditure for various input items in 2012, the likely farm gate cereal price that will prevail at harvest 2012 and the likely net margin of tillage farmers in 2012.

The Outlook for Input Expenditure

Fertiliser - usage and price 2012

A number of factors need to be considered when price and volume changes for fertiliser on crop farms are forecast for 2012. While CSO official monthly price indices for fertilisers did show a steady month on month increase for the first 10 months of 2011, there was a fall in price for Urea based fertiliser products in the last two months of 2011 and a fall in P&K compounds in early January 2012, but no official statistics are available as yet to document this fall in price. Market reports indicate that Urea prices dropped by nearly 10 percent in the last two months of 2011. Despite this recent price fall in Urea based products the current forward buying prices for Urea, CAN and P&K based products are all trading well above the average price recorded in January 2011. P&K compound fertilisers are trading around 20 percent higher in early 2012 compared to the same period in 2011, whereas CAN is trading at about 12 percent higher than 2011. These suggested price increases are higher than suggested price increases for livestock farms due to seasonality of purchases. The upward trend in fertiliser prices can be attributed to a rise in oil prices, increase in commodity prices and uncertainty regarding supply capacity.

Fertiliser usage in 2012 is expected to be on a par with 2011 levels, given that for agronomic reasons the scope for reduction in use in response to higher fertiliser prices is limited for cereal production. Overall, it can be expected that fertiliser expenditure will increase by about 15 percent in 2012 on cereal farms. This expenditure increase is significantly more than the expenditure increase expected on livestock farms given expected price and volume changes on livestock farms.

Seed - usage and price 2012

As mentioned previously in the paper, cereal farmers experienced an increase in seed costs in 2011 relative to the previous year due to the significant upward movement in the cereal markets. Given that cereal prices increased again in 2011 there has been a consequent further increase in seed prices for 2012. At present blue label seed prices are up about 6.5 percent on 2011 levels.

Crop protection - usage and price 2012

The increase in costs between 2011 and 2012 is forecast to be of a similar magnitude to the changes seen in the previous three years, which was minimal at just under 1 percent. Volume changes between 2011 and 2012 are forecast to be negligible.

Energy and Fuel - usage and price 2012

Fuel costs in 2012 will depend mainly on the evolution of crude oil prices. Current crude oil futures prices suggest that prices will decrease from the 2011 average during the course of 2012 by about 3 percent. However, in terms of calculating the actual price paid at farm level for energy there are a number o f other factors which need to be taken into consideration, such as the increase in VAT applicable from January 1st 2012 (increase of 2 percent) and the increase in carbon tax due on the 1st June 2012 (increase of 1.74 percent) Hence, for the purposes of this analysis it is assumed that fuel costs will remain at the average price paid in 2011. This static price assumption is also assumed for contractor charges in 2012. Assuming that usage is unchanged, expenditure on fuel and contractor charges are estimated to reflect the assumed price change.

All other direct overhead costs 2012

Given the continued weaknesses in the wider economy the outlook for other overhead costs are forecast to remain at 2011 levels in 2012.

In terms of land rental prices for 2012, there appears again to be some upward pressure on prices in 2012 compared to 2011. The inflationary pressure on land rent can be attributed to (i) the increases in farm gate cereal prices paid in 2011 (relative to the increases witnessed in 2010) and (ii) concern at farm level regarding the use of 2014 as a base year for future SFP entitlements which is resulting in upward pressure on land rental costs. Hence, for 2012 it is assumed that land rental prices will increase by approximately 5 percent on 2011 levels.

The Outlook for Markets 2012

The cereals market has encountered significant volatility in recent years. Planting decisions will be based on expected farm gate cereal prices in 2012. A number of factors must be taken into consideration when price forecasts for the coming harvest are being evaluated. To formally evaluate the risk associated with predicting the 2012 harvest price an econometric analysis was conducted to predict the probability that the 2012 farm gate price will be higher or lower than the 2011 price. This analysis was based on the December 2011/January 2012 LIFE futures price for November 2012. The regression analysis examined the historic relationship between (i) predicted futures price for the following harvest, made from the previous December/January when planting decisions were been made, and (ii) the actual farm gate price paid at harvest one year hence. This regression analysis enabled a forecast to be made of the 2012 Irish farm gate cereal price for wheat taking into consideration the differences between the historic predicted values and the actual outcome.

Figure 14: Probability that the 2012 Irish Cereal Price will be lower/higher than €165

Figure 14 shows that there is significant volatility around the forecast for the 2012 harvest price. There is an 86 percent probability that the wheat price at harvest 2012 will be lower than the €165 (the on account harvest price paid in 2011). However there is also a 14 percent probability that the 2012 price will be higher than €165 per tonne. Based on these probabilities the average predicted value from the model for the farm gate wheat price is approximately €145 per tonne at 20 percent moisture. However, there is significant variation surrounding this figure and based on a 90 percent confidence interval it is forecast that the figure could be as low as €113 per tonne or as high as €214 per tonne (Figure 15).

Figure 15: Historic, Estimated and Forecasted Farm Gate Feed Wheat Price (2000 - 2012)

The latest estimates for planted area in the EU indicates that there will be downward pressure on cereal markets in 2012. The latest edition of Strategie Grains (December 2011) has forecast a 1 per cent increase in planted area in the EU for the 2012 harvest. These area estimates, together with trend yield values, provide a first estimate of EU cereal production in 2012 of 290 Mt which is up 2 percent compared with 2011. This estimated increase in production appears to be putting pressure on cereal markets which has been witnessed in recent months and is expected to continue into mid year based on latest futures price forecasts. The increase in production forecast for 2012 is forecast to reduce the harvest price in 2012 relative to 2011.

Based on the futures market forecast and the adjustments made in the regression analysis for predicted versus actual outcomes, it is assumed for this analysis that farm gate cereal prices will decrease in 2012, by about 12 per cent. In addition to farm gate cereal prices at 20 per cent moisture, account is also taken in the 2012 forecasted net margin for a return to average moisture levels in 2012, which would see a slight increase in moisture levels for some crops which were harvested at relatively low moistures in 2011.

The Outlook for Tillage Enterprise Margin in 2012

Increases in seed, fertiliser and crop protection costs, land rent coupled with a relatively static general inflation factor for energy, and other inputs, suggest that cereal production costs are likely to be slightly higher in 2012 relative to 2011. In addition, output value is expected to decrease based on yield and price forecasts.

Figure 16 presents the actual gross margin for each of the main cereal crops in 2010, and the respective estimates and forecasts for 2011 and 2012. The net effect of input price, output price and volume movements is negative movements in gross margin forecasts for 2012 for each of the main cereal crops. While direct costs are forecast to increase across the board, based on trend yield forecasts, yields may be significantly lower than those achieved in 2011. For example, gross margins for winter wheat are forecast to decrease by approximately €450 per hectare, while gross margins for spring barley are forecast to decrease by approximately €320 per hectare. It should be noted that the average gross margin figures presented are market based gross margins.

Figure 16: Actual 2010, Estimate 2011 and Forecast 2012 for Cereal Crop Gross Margins

Similar to the format used to present margins in 2010 and 2011 earlier in the paper, the forecasted net margins for 2012, are presented for the cereal enterprise on specialist tillage farms, as well as the population disaggregated into one-third groupings based on margins obtained. Figure 17 shows the forecasted net margin for the cereal enterprise in 2012 which is lower than the estimated margin in 2011 and also lower than the actual margin in 2010. The main reasons for the lower net margin in 2012, of approximately €300 per hectare can be attributed to a rise in direct costs and some overhead cost components, coupled with a reduction in yields and price levels in 2012 relative to 2011.

Figure 17: Net Margin Actual 2010, Estimate 2011 and Forecast 2012 for the Cereal Enterprise on Specialist Tillage Farms 2008

Economic Analysis of Non Cereal Crops

At present the outlook for non cereal crops such as potatoes and other horticulture food and non food crops can not be examined in the same detail as cereals given the limited micro data for potatoes in the NFS. While data on potatoes is collected within the survey the sample size is not large enough to report statistically rigorous sample averages. In 2011 a new data collection process has been initiated to facilitate more in depth economic analysis of non cereal crops.

This new area of research involves collection of time series data to enable econometric analyses of price and production data for potatoes to better understand the relationship between supply and price in the national market. In addition, a new Teagasc profit monitor programme was launched for non food horticulture crops in 2011.

Concluding Comments

The 2010/2011 production year proved to be an improved year for tillage farmers. Reduction in global stocks led to a price increase for all cereals within Ireland and globally. Coupled with extremely good yields and modest input price inflation in key input variables, the estimated gross and net margins for cereals crops were considerably higher in 2011, than the 2010 and 2009 returns. However it is anticipated that the price of key input variables such as fertiliser, seed and land rent will increase in 2012. There is considerable volatility in the cereals market but based on futures trading prices in December 2011 and January 2012, it is assumed that 2012 harvest prices will be down on 2011 levels. In addition, yield forecasts for 2012 are also down on the yields achieved in 2011. The movements in input and output price variables are forecast to result in significant downward pressure on gross and net margins in 2012. Finally, given that volatility will remain an issue over the medium term, without risk management strategies Irish cereal farmers will continue to see fluctuations in margins into the future.

References

Hennessy, T., Kinsella A, Quinlan G and Moran B (2011) National Farm Survey. Teagasc, Ireland.

CSO (2011) Agricultural Price Indices: Preliminary Estimates 2011. Statistical Release. Available on - You can view the full report by clicking here.
January 2012

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