Clearing the commodity price confusion?


We are delighted to welcome Pat Tomlinson to Old Mill as an Associate Director in the rural team.


Pat Tomlinson, Associate Director, Rural Services


Pat comes with a strength and depth of experience in the Agriculture, Agri-food and finance sectors, mainly through his banking career, which culminated in being Head of Agriculture at HSBC Bank. Pat’s experience and abilities across all areas of business advice will be a valuable asset to the team and the service we provide to our growing client base; he will also be completing his professional accountancy qualifications as soon as possible.


Are international commodity prices relevant to UK farming? Of course they are – or they should be and I hope, will be more so.


It is true that very little of what UK farming produces ends up in world commodity markets, but nearly all of it is influenced by world prices. They represent both the price at which any surplus home-grown product could be sold onto world markets and critically, the price at which products could be imported into the UK, to compete with home-produced goods.


Wheat remains the most important commodity price for UK farming, not simply because we produce so much, but also because it puts a base into so many costs of production – either directly through feed costs, or indirectly through demand for common inputs such as fertiliser and land rents. The old adage “up corn, down horn” remains as relevant now as ever, with all sectors that use grain and/or the same inputs as grain production likely to see costs of production vary directly with the price of wheat and not necessarily feed through to their sale prices.


Dairy commodities are always in the spotlight during milk price negotiations – but again, precious little UK milk ends up on the world market and most UK milk prices have no direct link to commodity prices. Commodity prices are currently more important to UK milk producers because they influence the price at which products could be imported into the UK to reduce the price of, or even displace, home-produced ones.


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International prices cannot be discussed in isolation from exchange rates. As sterling weakens against competing currencies (euro and dollar), then the prices received by UK farmers improve (the impact of exchange rates on farm prices is far greater than their much heralded impact on Single Farm Payments).


As I write, commodity markets are booming again for both wheat and dairy – demand is up, supply is down and sterling is 25-30% weaker than it was two-three years ago. The non agricultural media and investors are once again taking an interest, which will only stoke the fire.


Accepting that commodity prices are important, what are the prospects? Let’s look at the long term first (because it’s easier to).


The world is undoubtedly going to have substantially more people to feed over the next 50 years with limited natural resources, which should simplistically translate into higher demand and so, higher prices. Some are excited about the added prospect of demand from the biofuel sector, but I am not convinced that the use of grain for fuel will be a long term influence.


The world population is also going to become wealthier – particularly in the East – and as people become wealthier they move from grain based diets to meat and dairy based foods, which in turn use more grain to produce.


Consequently I have no doubt that the long term prospects for commodity food prices are very good and that over the next 50 years we will see a continued trend of gradually increasing prices.


Now the short term – will commodity prices go up or down? The answer is a definite YES and the difficult bit is predicting when, which direction and by how much. The main reason is as basic as Mother Nature and the consequent variations in harvests from the major grain growing regions year on year – and with stocks now much lower than previously available to buffer annual harvest variations, the impact on short term demand and thus price is greater than it used to be.


Many people will continue to try and project short term prices – some will be lucky and get it right, most will not. My solution is to take the “five year view” – over any and every five consecutive year


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