Australian and international farm policy news

€500 million comprehensive package of measures to support European farmers

In early September the European Commission released a package of support of €500 million of European Union (EU) funds for the benefit of farmers. The three main support packages were focused on:

1.    Helping farmers in the short term facing cash flow difficulties, especially the dairy sector.

2.    Addressing the market imbalance by stimulating demand and reducing supply, includes storage aid for butter, skimmed milk powder and pig meat and includes promotion and market discussion for dairy and pig meats sectors along with markets.

3.    Tackling supply chain challenges by establishing a new High Level Group focusing on credit for farmers, financial and risk hedging instruments.

These packages are designed to target the EU Member States farmers that have been most affected by the fall in pig meat prices, the impact of the Russian ban on imports of food from Europe, the very low milk prices and the current summer drought. Interestingly, EU farmers already receive over 40% of their annual income from EU taxpayers, but the current commodity price downturn has resulted in farmer blockades and protests, and the almost inevitable response from the EU. Australian farmers can only wonder at the scale of political power that the European farm sector appears able to wield in these situations!

ABARE reports Australia’s farm production forecast to hit $57.1 billion

Favourable seasonal conditions, an assumed lower Australian dollar and strong international demand is expected to drive the value of Australian farm production to record heights in 2015–16.

The gross value of Australia’s farm production is forecast to increase by 8% in 2015–16 to $57.1 billion, around 16% higher, in nominal terms, than the five-year average, according to the September edition of ABARES’ Agricultural Commodities report.

The value of livestock production is forecast to increase by 11% in 2015–16 to $29.1 billion, on the back of an expected increase in farmgate prices for beef cattle, lamb, sheep and wool. ABARES has also projected an increase of the gross value of crop production, which is expected to rise by 5% in 2015–16 to $28.1 billion.

The index of unit returns for Australian farm exports is forecast to rise by 4% in 2015–16, following an estimated rise of 6% in 2014–15. The forecast increase in 2015–16 mainly reflects the effect of the decline in the Australian exchange rate, especially against the United States (US) dollar.

This report highlights the major impact that the exchange rate of the Australian dollar has on the level of farm returns, and the impact and cost to Australian farms that was imposed on the sector by the mining boom over the past five years.

Mandatory market reporting to stay in the US

The USDA has recently released the findings of a research project, the objective of which was to assess the effects of the Livestock Mandatory Reporting Act on the operation of US livestock markets. The legislation currently in place in the US requires large-scale participants in specific livestock markets, including beef, pork, and sheep and lambs, to provide specific details of the numbers purchased, and the weights and prices paid for livestock to the USDA within specified timeframes.

One of the challenges associated with this sort of analysis is to try and establish what would happen in the absence of mandatory price reporting, and to use that as the basis to analyse the impacts of the mandatory reporting measures. This challenge is made more complicated by the drift away from more open price discovery mechanisms such as open-cry auctions, towards what the USDA refers to as alternative marketing arrangements (AMAs) that include contract supply arrangements, formula pricing forward sale arrangements. These AMAs have become predominant in the US pork and poultry industry, and also for the sale of slaughter cattle – mainly by feedlots.

The analytical method used to determine the effects of mandatory livestock reporting are somewhat complex, and essentially involve a comparison of the differences between AMA prices (forward sale and futures contract prices) and open-cry auction prices, before and after the introduction of mandatory livestock reporting. The analysis is made all the more complex by the fact that the US had a system of voluntary livestock market reporting prior to the introduction of the mandatory reporting system.

In summary, the analysis found that while results were mixed under mandatory reporting, the prices observed for AMAs generally were more closely correlated with prices reported at open auction, and that the prices farmers received under AMAs were responsive to changes in prices received at open auction, indicating that the mandatory reporting system resulted in welfare gains to livestock sellers, meatpackers, and – ultimately – consumers, all of whom benefit from having more information on prices.

US corn prices and farm returns

The projected average net income of grain farms in Illinois is estimated at around US$15,000 per farm, a huge drop from 2014 average of just above US$100,000 per farm (University of Illinois). Why such a difference? Corn growers in the US have experienced an extended run of good years prior to 2014, due to the biofuels mandate which dictates that almost 40% of US corn production goes to ethanol, and also due to strong demand from China. The demand from China currently appears to be a bit uncertain, and US corn stocks are now climbing on the back of three near-record harvests; all of which has combined to send the price of corn down from almost US$8 per bushel in 2012 to around US$3.80 currently. Recent projections of another record corn harvest in 2015 are further contributing to downward pressure on corn prices. 

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