Everett Griner talks about how farmers benefit from low oil prices in today’s Agri View.
From: Norton Rose Fulbright
Low oil prices might sound like good news for farmers, but the near-inevitability of accompanying low agriculture commodity prices and broader macro-economic factors is likely to eliminate any cost-saving benefits. Low costs together with the likelihood of continued steady demand, reflecting the non-luxury nature of the products in the agri sector, are likely to mean that low oil prices will most negatively impact the economies of those commodity exporting countries least equipped to absorb them.
The reality for producers
With most industry analysts in agreement that oil prices are likely to remain significantly below historic levels throughout 2015, farmers might be expected to be rubbing their hands with glee at invariably lower operating and shipping (among other) costs.
Yet the correlation between oil and agriculture commodity prices (the two broadly rise and fall in tandem based on a multitude of factors, including energy consumption in farming and the use of feedstocks for biofuels) means that production cost savings are likely to be offset by reduced sales revenues, leaving the average producer facing greater challenges in raising finance and unable to lift its margins in a low-cost climate. Prices might not drop in the same steep proportions as oil; however, fuel costs in reality represent a low component of the production costs for a large proportion of agriculture produce (despite the perception of agriculture as an energyintensive (thus oil-reliant) sector).
The greatest effect of this low-price climate is likely to be the significant depletion of revenues at a national level for oil-exporting countries, many of which are heavily reliant on agricultural imports. Where, in addition, the local currency of such countries is weakening against a strong dollar (the currency in which most agricultural commodities are denominated), these effects will be compounded to reduce that country’s commodity spending power.
Contrast the above with the situation in Europe and other oil-importing economies. While low oil prices traditionally accompany an economic downturn, the current drop has been driven by a perfect storm of oversupply (in proportion to less-than-anticipated demand), OPEC (Organisation of the Petroleum Exporting Countries) policy and dollar strength. Low oil prices in these circumstances are likely to promote economic growth for importing nations, resulting in cheaper fuel on the one hand and an increased capacity to consume a wide range of goods on the other.