Farm Business Survey
Rural Business Research
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(definitions given below)
    
 Crude
Oil
Wheat£_$£_€NH4Nat.
Gas
Soy
Meal
Palm
Oil
RPI
Market: 53 148 0.747 0.903 290 1.85 319 606 3.4
Assume:

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† Calculation of projection index (coefficient) is as:

"{Yield_factor} * {Price_factor} * {Quantity/Numbers/Area_factor}". Where values are unknown, or not real, they default to 1.000 (thus the 'Yield' or 'Quantity' factors for each of the gross margins coefficients above are virtually always 1).

†† Default 'Price Factors' will be adjusted, periodically (fortnightly), by market prices and exchange rates.

 

Methodology

Prices, in futures markets, that are related to farm input costs and product prices are used to derive the projection indices. The futures prices were chosen as they are for commodities for which liquid (in the sense of 'much-traded') prices are available on our projecting horizon (which is looking one to two years ahead). They also relate to agriculture, directly as products or inputs or, at least, as inputs to the farm input. As in, for example, the case of crude oil and ammonia prices, for fertiliser expenditures.

The projections are mostly straightforward arithmetic relations between: i) historic prices (which are taken as September in the harvest year of the most recent Farm Business Survey results, OR the actually achieved FBS sale prices) and ii) futures prices in the projected year (which is 1 to 2 years ahead). December settlement price is used, instead of September, in the case of Crude Oil (because that contract is traded in much larger volumes).

In the case of fertilisers and dairy concentrates we link these to futures prices for their direct inputs (oil and ammonia, or wheat and soybean meal, respectively). For fertilizers recent history suggests that these commodities are more volatile than the survey expenditures, so we use damping coefficients (k) which mean the projections are only 55% of the relative prices (for the inputs).

In the case of dairy concentrates, UK wheat prices are combined with Chicago soymeal prices in the ratio of 4:1, which is (what we assume to be) approximately the physical ratio for a protein adequate dairy ration.

For Winter Oilseed Rape, projections assume that the forward rapeseed price is the historic rapeseed price times the sum of 0.7 times the relative price of Chicago soymeal plus 0.3 times the relative price of Malaysian crude palm oil - both traded on the Chicago Mercantile Exchange (CME). Relatively greater weight is given to Soymeal than would be the case for strict physical proportions, because this soymeal is much less volatile and more liquid than the MCPO futures. Also this give a somewhat better fit in econometric estimations (back testing).

Crop protection costs are assumed to be the same as in the most recent year. So, our cost projection index for crop protection is always 1.00. This is because, owing to substitution possibilites and supplier pricing strategies as well as manufacturing inputs being (generally) a very small portion of price, the amounts spent on crop protection are largely unrelated to broad classes of input costs for which market prices are available (like crude oil or natural gas). Hence, given that there no relationships with forward markets and historic costs, we use the simplest projection assumption (also called the 'naive' forecasting method) - that 'next years costs will be the same as in the most recent data'.

Milk price changes, recently, are accounted for in the price factor (used on the respective measures for milk sales, milk economic output, and milk price) - which is equal to the most recent price published by DairyCo divided by the experienced milk price in the recent FBS year.

Basic Payment rate is assumed to decline by 2% relative to the December 2015 Basic Payment (+ Greening), paid in Euros and affected by (forward) exchange rates (and hedging). This is in line with industry guesses - which reflect the agreed change in the EU Multi-Annual Financial Framework (and Financial Discipline) [see for example ec.europa.eu/agriculture/cap-post-2013/index_en.htm or capreform.eu/the-cap-budget-in-the-mff-agreement].

Projected yields are, for crops, 'Olympic Averages' (average of the most recent 6 years, without highest and lowest values) adjusted by long term yield trends (1 per cent increase per year). For dairy, projected yields are just yield in the most recent FBS year adjusted to trend of most recent 6 years (currently gives circa 2.0 per cent increase per year).

Please bear in mind that projections are for 23 to 12 months ahead, projected from the harvest before last.

Some users, it is likely, will have better projections of prices, or more recent prices. Hence you have the option of using your own commodity future prices (to look at what average FBS margins might look like, and/or to project your own margins forward). In this case the output screen displays a warning that 'you have changed the price assumptions!'.

 

Market Price Variables

CrudeOil: ICE-Brent Monthly Crude (USD per barrel - for December 2018)

Wheat: UK FEED WHEAT FUTURES (formerly LIFFE wheat; symbol T) (GBP per 1000 kilograms - for November 2018)

GBP_USD: Pounds Sterling per United States Dollar (Chicago Mercantile Exchange - for September 2018)

EUR_USD: Pounds Sterling per Euro (USD_EUR*GBP_USD: Chicago Mercantile Exchange - for September 2018)

NH4: Ammonia (USD per 1000 kilograms: Black Sea - for Spot)

Nat. Gas: European Union Natural Gas Import Price (USD cents per kilo Watt hour (US ¢ / kWh) World Bank Commodity Review - previous month)

SoyMeal: Soya Bean Meal (USD per 1000 kilograms: Chicago Board of Trade - for September 2018)

PalmOil: Malaysian Crude Palm Oil (MCPO) Calendar Swaps (USD per 1000 kilograms: Chicago Mercantile Exchange - for 3rd month forward )

RPI: Retail Prices Index (HM UK survey forecast for 2018)

 

Credits

Mark Reader, RBR Cambridge

Ben Lang, RBR Cambridge

Andrew Moxey, Pareto Consulting, [Independent Consultant]

Paul Wilson, RBR Nottingham

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