12
The outlook for grass-based
farming is `extremely good'
MICHAEL MURPHY *
BETWEEN November 2006
and January 2007, I was prob-
ably the first person world-
wide to predict an excellent
future for grass-based dairy-
ing. I was confident then, and
still am today, that this is a
valid assumption, with agri-
culture less subsidised now
than in the past.
The world reached a tip-
ping point in 2007/08. In sim-
ple terms, world demand for
food and energy began to
outstrip supply. The inevita-
ble outcome is that food
prices are rising and will
continue to rise Ð reversing
the strongly established trend
of falling food prices. The era
of cheap food is well and truly
over.
Rising food prices will be
great for farmers Ð espe-
cially grass-based dairy farm-
ers. Over the past 50 years,
declining food prices Ð in
real terms Ð and rising costs
have hammered farm profits
and decimated farmer num-
bers. Price increases are long
overdue.
However, it gives me no
pleasure to predict some pos-
sibly appalling consequences
of high food prices for man-
kind. Based on what I have
learnt, I suggest that the 21st
century will be characterised
by a desperate struggle for
sufficiency in food, energy
and water, rising food prices
in real terms, extreme hun-
ger and famine as well as
social unrest and wars about
resources.
Food demand is being dri-
ven upwards by increased
population, increased afflu-
ence, changed eating habits
and competition between
food and energy for land use.
Food supply will be re-
strained by water shortages
and desertification, espe-
The `China effect' on world commodities
IN commodity production,
more demand than supply
leads to price rises, and vice
versa.
For about 25 years from
the mid-1970s, commodities
markets worldwide were in a
slump. Since then, we have
seen a huge shift globally in
commodity markets. Over
the last 10 years, we have
gradually seen `hard' com-
cially in highly populated
countries like China and In-
dia.
A possible wild card will be
innovation. Humans are al-
ways most resourceful when
the need is most pressing.
Presently, there is little poli-
tical understanding, or will,
to prevent this massive emer-
ging threat.
Global warming gets all the
publicity, but the real immi-
nent threat to the human race
is starvation on a massive
scale. Taking a 10 to 30-year
view, I believe that food
shortages, famine and huge
social unrest are probably the
greatest threat the human
race has ever faced.
COSTS TO DRIVE
UP MILK PRICE
The outlook for grass-based
dairy farming is extremely
good as I expect milk price
will inevitably go up. Some
90% of world milk is pro-
duced in confinement dairy
units. Confinement means
that cows are housed and fed
in buildings for most of their
working lives. Nearly all the
feed is brought in to the cows.
Grass and maize silage may
be produced on the farm but
grain must be bought in.
Slurry is stored and spread
on nearby land.
Confinement units are
high users of energy and
grain Ð both rising rapidly
in cost. This means that pro-
duction costs for 90% of
world milk production will
also rise. I believe that milk
prices will inevitably follow
upwards to keep these produ-
cers in business Ð not be-
c a u se t h e w or l d l i ke s
confinement dairy farmers,
but because dairy products
are a staple part of the diet
of consumers in developed
countries and consumption
of milk is rising rapidly in
places such as China.
Unless the world stops
drinking milk and eating
cheese, world milk prices will
have to rise to keep confine-
ment producers in business.
This means a very bright
future for efficient grass-
based milk producers.
modities swing into a `bull'
(buoyant) market, e.g. oil,
cement, zinc, nickel, copper,
silver, platinum etc.
Occasionally, prices fall
somewhat as demand tem-
porarily drops or more sup-
ply is brought on stream, as
we have seen this month.
But essentially, we are in a
fantastic bull market for
hard commodities.
NEWS FEATURE
Yes, there is a real risk of
price volatility, especially in
the next three to four years.
This may happen if the really
big boys of world dairy Ð the
US and the EU Ð increase
milk production. This may
reduce price in the short-
term, but will quickly self-
correct because EU and US
producers cannot survive at
low milk prices.
Over time, confinement
dairies, with their much
higher cost base, will need a
high price for milk to sur-
vive.
Milk from grass will then
have an even bigger competi-
tive advantage in the future
than in the past. Grass-based
dairy farmers who watch
their costs and don't overpay
for land will do very well.
This is a major and lasting
structural change. It is not a
cyclical blip. Dairy markets
will be more volatile than in
the past with very rapid
changes up and down in milk
price.
CHEAP ENERGY
IS HISTORY
Researching this was frus-
trating. The experts are hu-
gely divided. Many say `peak
oil' has already happened,
and supplies will soon fall.
Their view is supported by
the fact that oil production
has only increased from 86.13
The informed view is that
we are just at the early
stages of a period where
`soft' commodities (i.e. food
stuffs) will join this trend.
Sugar in 2005 and grain in
2006 were the first soft com-
modities to join this bull
market. Milk followed in
2007 and beef in 2008.
The world economy has
grown by 4.75% per annum
to 86.55 million barrels per
day since 2006. Simulta-
neously, oil usage has been
growing much quicker and is
now only about 2.5-3% less
than oil production.
The opposite view is taken
by the OPEC cartel of oil-
exporting countries, who say
that additions to recoverable
reserves over 25 years are
three times higher than oil
pumped over that period.
The International Energy
Agency expect oil production
to rise strongly to 130 million
barrels per day by 2030. But it
also says that demand will
rise stronger than supply.
So oil won't run out any
time soon but we will never
again see cheap oil.
Strong economic growth
has tilted the balance in fa-
vour of sellers. Speculative
investment by hedge funds
may have driven prices high-
er than is justified by the
present supply/demand bal-
ance but we will never again
see oil at US$40/barrel, as we
did in 2005.
* Conclusion: cheap oil is
history
LOW GRAIN STOCKS
MEAN HIGH PRICES
In 2007, the world grew an all
time record total cereal crop
of 1.66 billlion tonnes, up 89
million tonnes on 2006, which
was also a very good year. Yet
since 2004, the fastest growth
for over 30 years. This is
creating a huge demand for
all kinds of material.
Asia is driving that
growth. China, India and
Vietnam have partly liberal-
ised their economies, yield-
ing growth rates of 8 to 10%
last year. When hugely po-
pulated countries grow very
rapidly, it strengthens com-
28 June 2008
stockpiles of cereal crops
were down by 53 million
tonnes in December 2007 com-
pared to December 2006. Glo-
bal stocks have declined for
the seventh year in a row.
Corn stocks are at their
lowest level since 1983. Wheat
stocks are at their lowest
level since 1947. There is a
similar trend of sharp falls
for soya bean and vegetable
oil.
Measured in absolute
terms, inventories have
halved since 2000. In terms
of days of supply in hand,
global grain stocks have fall-
en from a peak of 130 days to
a current level of 55 days.
Unless supply can respond,
the world will be facing acute
shortages in the next few
years.
The buffer supplied by in-
ventories of grain in the past
is now history. We have en-
tered a new era of danger-
ously low grain stocks.
Rice stocks have followed
modity markets.
By 2010, China is expected
to be home to 250 million
middle-class Chinese Ð al-
most the entire population of
the US! Another 200 million
people now have much high-
er incomes than 20 years
ago. The trend in India is
very similar.
To have any hope of suc-
cess, the communist party
Irish Farmers Journal
the exact same trend and are
also run down to dangerous
levels. Argentina, China, Rus-
sia and the Ukraine have
banned wheat exports to drop
wheat prices to their own
populations. Many Asian
countries have done the same
with rice,
MORE GRAIN NEEDED
We are in the very early
stages of a huge structural
increase in demand for grain.
World population, cur-
rently at 6.7 billion, is fore-
cast to grow to 9.2 billion by
2050. At present, arable land
amounts to 1.5 billion hec-
tares. This land area is pre-
dicted to be unchanged in
2050. So, farmland per person
will decline from 0.23 hec-
tares/person to 0.16 hec-
tares/person.
Meanwhile, increasing af-
fluence leads to more meat
and milk consumption in
emerging economies. In 1985,
the average Chinese ate 20kg
needs the Chinese economy
to keep growing at +8%
annually, for at least another
25 years, while about 20
million people switch away
from peasant farming to in-
dustrial and service jobs
every year.
That `China effect' on
world commodity sets the
scene for a prolonged bull
market in grain.