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Low Oil Prices Have Far-reaching Impact on Agriculture

Low Oil Prices Have Far-reaching Impact on Agriculture

03 February 2015

GLOBAL - 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. In the first instance, 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.

Limited direct impact on production costs

Perhaps the most logical influence on margins would come from the strong correlation between crude oil and red diesel prices.

However, as shown in Figure 1, the direct contribution of fuel costs to costs of production is rather small across many livestock and arable sectors.

However, unlike like a cost such as machinery depreciation, fuel is a cash cost which the farmer has to consciously pay for.

If lower fuel prices prevail into the 2015 growing and harvest season then this should take some pressure off farm cash flows due to lower machinery running and crop drying costs.

Further Reading

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