The "ifs and buts" of a cost-of-living crisis
7% Of At Record Will Inflation Finance For The A Run Expectation Further That Department Their Put On Have 2023
Inflation is public enemy number one.
The vast majority of us as Joe and Josephine public are suffering in one way or another, whether that’s through increased fuel costs, home heating and electricity costs, food price inflation or increased mortgage payments as a result of recent interest rate rises.
Of course, the outcome of the war in Ukraine, and when that comes to fruition will have a big bearing on the global outlook. We have little control nationally or at an EU level, and on the assumption the conflict rumbles on, it is worthwhile looking at the other macro level issues albeit they are inextricably linked.
Will energy and fuel prices increase again? What will happen when Europe runs out of gas storage? Will food inflation stop at current prices or will our food shopping bills escalate much further?
I doubt anyone can say with any degree of certainty where exactly we will be in 12 months' time, but the Department of Finance have put on record their expectation that inflation will run at a further 7% for 2023, with core inflation making up 4.5% of that 7% rate.
As the saying goes, nothing fixes high prices better than high prices, and already there are murmurings of a slowdown in building as the costs of building are seen to exceed the price recoverable from a prospective sale of the property.
Increases in bank interest rates are also making developers wobble, as the borrowing capacity of prospective buyers is hemmed in by a higher stress testing of their repayment capacity.
Reduced demand reduces the price pressures. A slowdown in the world economy will naturally reduce the demand for gas, fuel, and other commodities which will lead to a price correction.
It seems that non-free or controlled markets such as the oil market predominantly controlled by OPEC may not deliver the corrections expected at the expected time, especially where supplies are restricted in an attempt to maintain prices.
From a farming perspective, Ireland does produce many premium products which in the face of more discerning buyer discretion might be pulled back. The fear for farmers is that the Sunday roast is swapped for bangers and mash, or the latte is swapped for a bring-your-own coffee from home.
Small incremental changes taken at a national population level and wider global level can tip the balance on supply and demand.
Equally, our biggest trading partners in terms of agricultural commodities, the UK, are both experiencing similar domestic inflation but secondarily a drop in the value of their currency meaning the purchase of Irish premium products might be left on the shelf.
From a farming perspective — caught in the trap of increased input costs (feed, fertiliser, fuel, electricity to name just a few) and faced with declining demand for output — one important question is whether all this macro level change will put farmers in a precarious position between the rock of higher input prices and the hard place of falling demand and output prices.
The lack of fertiliser production in the EU will naturally reduce commodity production of cereals such as wheat, barley, maize, oats and soya — which in itself will support prices for product that does come to market.
Similarly, the proximity of domestically produced EU grain rather that the regulatory difficulties administratively and from a quota/tariff perspective is likely to see EU grain can at least some level of premium.
In some respects, the problems of high fertiliser prices for 2022 did take full effect for 2022 harvest season for farmers as lack of availability, merchants and wholesalers had a carry-over of both cereal stocks produced and bought up at 2021 harvest prices, and fertiliser product produced in 2021 is either sitting in producer, wholesaler or farmers' yards.
The grain prices over the coming months, fertiliser prices next spring and forward contract prices will have a big bearing on EU cereal production.
At a domestic and EU level and perhaps more acutely in the UK, the move to reduce restrictions on the import of commodities from South America as a panacea to reduce food inflation might be tempting.
The prospect of the UK engaging in such action is more likely than the EU, given that it can effectively act on its own accord without consensus, and may well find itself facing even higher levels of inflation as its currency becomes weaker.
Should this come to pass, this will be a particular boon for South American countries, and in the context of huge export demand, export tariffs and even export restrictions might be introduced where countries seek to stabilise food security for their own countries.
Global grain stocks are relatively low, according to USDA, global stocks of wheat at the end of 2022/23 are likely to be 10% lower than that which existed for 2019/20.
There’s a lot of "ifs and buts" between now and next year, and external factors such as poor growing seasons, droughts, floods or equally surplus production can bring about a rapid improvement or deterioration in our fate.
Absent of a crystal ball, I cannot offer predictions, but what is clear is that there are many factors that will make it difficult to navigate the optimum farming profits strategy over the next year.