How has COVID-19 affected input prices?

Wednesday, 13 May 2020

By Felicity Rusk

With the ramifications of COVID-19 being felt across all markets, let’s take a look at how the pandemic has affected input markets.


As the scale of the coronavirus began to become apparent at the end of January, sterling started to weaken against both the euro and the US dollar. On 18 March, sterling hit a 35-year low against the US dollar as the UK government implemented measures to try to reduce the impact of the virus on the economy.

Since then, sterling has shown some recovery, due to the economic stimulus packages from the US, UK and other key nations. Nevertheless, sterling remains weaker than pre-COVID levels. As such, while this does make UK goods more competitive on export markets, it also means it is more expensive for the UK to import goods. This is significant for farm inputs in which the UK has a higher reliance on imported sources.

 


Global oil prices fell dramatically in the first four months of this year, as the coronavirus pandemic swept across the globe, collapsing demand. In April, the OPEC crude oil basket price averaged $17.66/barrel, 73% less than the value in January.

The quarantine measures introduced by the major economies meant that demand for oil for transport use diminished. As result of the rapid drop in demand, US oil prices turned negative for the first time on record on 20 April. This means that oil producers were actually paying buyers to take the oil away. Since then, oil prices have continued to remain at a low level, as supplies are in surplus to demand.

 

Prices of both UK red diesel and diesel at the pump have recorded month-on-month declines. However, it is important to note that these prices do not fully reflect the crude oil markets as they include taxes and profit margins for the sector. Nevertheless, the ramifications of the pandemic are likely to hang over markets some time and so fuel prices have potential to move down further.


One of the key challenges facing domestic inputs is the devaluation of sterling against the dollar. While currency has fallen away, the global collapse of stocks, bonds and equities has also collapsed the value of crude oil and pressured the price of global natural gas, a key input for ammonium nitrate. Sterling movements have lessened the pressure on UK natural gas prices, which have followed a comparatively normal trend for the time of year.

 

Nevertheless, the coronavirus pandemic has occurred when the majority of European crops are already in the ground. As such, most of the production inputs, such as fertilisers and agrochemical will like already be on-farm. However, the EU is not self-sufficient in mineral fertilisers. Typically, the EU imports these mineral fertilisers from Eastern Europe (e.g. Ukraine and Russia) and North Africa (e.g. Morocco & Algeria).

As such, some reports have highlighted potential concerns over the disruption to supply chains, which would create price volatility. However, the latest outlook from the EU Commission expects that there will be no major issues in terms of availability as a result to the pandemic. Furthermore, it suggests that fertiliser prices could decline, reflecting the fall in energy prices.


Several sources have highlighted potential challenges facing the production of feed additives within the EU. China is one of the key suppliers of micro-ingredients, such as amino acids and vitamins, however supplies have reportedly been disrupted by logistical challenges. As such, some European based feed companies have reportedly suffered shortages of these key micronutrients.

For example, Evonik, a feed additive company based in Germany had to cease production on 11 March due to a shortage of raw ingredients from China. However, a handful of other feed companies have confirmed they are confident of product availability.

As such, it is challenging to know how wide spread the issue is. It is highly dependent where these European based companies source these raw material from, and whether they have been able to find alternative sources if supplies have been disrupted. Nevertheless, a wide-spread shortage any of the essential micro-nutrients has the potential to serious hamper growth and productivity.

As such, we will continue to monitor the situation as it develops.


Straw prices have crept up this year, increasing by couple of pounds every month. This is typical for the time of year as supplies begin to dwindle and producers look to lock in supplies for the coming winter.

 

The fifth wettest autumn on record hampered the drilling of winter crops. According to our early bird survey, the UK wheat planted area is estimated to be 17% smaller than in 2019. However, many producers have instead turned to spring crops, particularly spring barley. As such, the planted area for spring barley is forecast to be around 47% larger than in last year.

Nevertheless, the prospect of a smaller domestic cereal crop has supported straw prices, particularly as producers begin to purchase supplies for the coming months. 

Felicity Rusk

Analyst - Livestock

Sign up for regular updates

You can subscribe to receive Dairy market news straight to your inbox. Simply fill in your contact details on our online form and select the information you wish to receive.

Visit the Keep in touch page

More Dairy market news

×