Farm Diary October 15 2008

When a country which has a population the size of Coventry springs to prominence and owns half the high street here, it should have been obvious.

No one had heard of Reykjavik until President Reagan met Gorbachov there in the early eighties! What has this to do with farming? Quite a lot actually; people need to eat whatever the economy is doing, and as we are re-evaluating what our priorities should be, I would suggest food comes near the top.

Farmers and agricultural businesses will find that borrowing money is now going to be very much more difficult and as investment is especially important on farms to meet stringent new environmental legislation, there could be problems, especially for tenant farmers.

Confidence will be affected, and as confidence is already fragile, the will to invest and take risks is not so apparent. Indeed, with the country now very short of milk (September figures a million litres a day below 2007), more factory closures are likely as processors find themselves in all sorts of trouble.

With volatility in world and European commodity markets, methods of minimising huge price swings need to be introduced, or more farmers will leave the industry as they fail to cope with the 'low's', after missing out on the high prices during the 'high's'.

Dairy farming is long term, with investments needed for the next twenty years for those who need to invest for the future. At the south West dairy event two weeks ago, around thirty farmers were in the lecture room attending the 'Dairy Seminar', and when asked for a show of hands after asking who was planning significant investment for the future, for the first time ever in my experience, not a single hand went up.

What about the price of food? As we all know, there has been inflation in food prices for the first time over the last year or so, as a result of very high oil prices and shortages of food as Asia (China in particular) develops it's economy and diets change as citizen's become more wealthy. Now of course, oil prices have dropped sharply, a bumper crop of wheat and rice has been harvested in the world and the prices have fallen to almost half where they were six months ago. If the wheat in the ground this autumn has to be sold at today's prices (which are still falling), then acreages planted in 2009 will fall sharply and we'll be off on the same cycle again. Milk prices are falling in Europe and I can see real difficulties this winter if they fall further. The UK is unique as milk prices are still rising on the back of severe shortage of product, but cheese and most manufacture milk price is high due to currency exchange rates and if for some reason the pound were to strengthen against the euro, then real pressure would instantly be applied to prices.

In the supermarkets I predict that food inflation has peaked, and there is going to be the mother of all price wars as we head for Christmas. Christmas 2008 in supermarkets is going to be about price, price, and price. Tesco in particular, are determined to slow the growth of discounters (Aldi, Lidl, Netto etc:), challenging the store Terry Leahy admires most (Asda) to the title of cheapest store. T

This will bring massive pressure to bear on suppliers and farmers in particular as we return to the old days of food wars. People still have to eat, and although farming may not do that well when times are good, it tends to survive recessions better than most due to that fundamental fact. My worry is that agriculture production in this country is falling, and government seems not to care.

That will change from now on, and the pressure groups that have thrived on the good times will hopefully be put back in their box as priorities change abruptly when things go wrong, and my have they gone wrong this time!

In recession, people cut back in many areas, they shop smarter for food too, but do not reduce outlay significantly. In a recent survey a massive 84% said their shopping habits had changed due to the credit crunch, with consumers buying less alcohol, confectionary and meat in particular. 54% said price is the most important thing, with 21% healthy eating, 7% local food, and a paltry 3% ethical and organic. Concerns about quality, ethics, environment, obesity have all been shelved as price takes over in most people's minds.

Who will benefit? The discounter's; but they just do not have the scale, and this is where Terry Leahy's plan at Tesco comes into fruition, especially astute when one considers that most consumers do not think supermarkets have done enough to keep food prices down!