Spain: Input costs putting squeeze on livestock sector

Resilience

If during the pandemic the word resilience was the concept to define the agro-food sector, livestock farmers will have to use it again, since the push of international regulations and agreements, as well as the decline in meat consumption, do not leave them many alternatives. The increase in the cost of raw materials used to produce animal feed and the spectacular rise in the price of electricity must also be added to this.

Feed prices began to rise in the last quarter of 2020 - still in the midst of the pandemic - while electricity began to skyrocket as of June 2021.

Why have feed costs gone up?

The main reason, according to Jorge de Saja, general manager of the sectoral CESFAC, lies in an imbalance between supply and demand. He also points to a combination of climatic and market factors coinciding in several parts of the world.

"For a couple of years the demand for food raw materials - particularly for animal feed - has been growing ahead of supply globally, leading to a reduction in worldwide stocks". As far as Spain is concerned, " this increase in costs is more evident here because we are a large livestock-producing country with a structural deficit in cereals”, he adds.

The Ministry of Agriculture, Fisheries and Food is aware of the impact this situation has on the livestock sectors, "since feed represents the highest cost of animal production", between 50-80% of total production costs.

Dairy and pig sectors

Although all sectors are being affected by the sharp rise in the costs of the main inputs, the worst affected by the feed rise are the dairy and swine sectors.

Meanwhile, the beef cattle, poultry, poultry-laying and sheep-goat sectors seem to have improved their prices somewhat at the farm gate, but also the contraction of supply and an improvement in exports have taken place.

Dairy cattle have been dragging this crisis for several years now, and currently with the sharp increase in feed and electricity costs, many farms are at a cliff’s edge. According to farmers’ organizations, producing milk today costs farmers 0.38-0.40 €/liter, while the industry pays them around 0.34 €/liter and the retail price per liter of milk is at an average of 0.80 €.

After two or three years of prosperity, price reductions have reached the pork sector, once the Chinese buying halt has been confirmed, with supply exceeding current demand in the EU market. This situation is taking place in a context of high feed costs, further squeezing the sector's margins.

Despite this, it is expected that the situation will improve by the end of the year, because there is already a slowdown in supply, without ruling out a cut in the short term, and alternative destinations to the Asian giant are being sought.

Feed cost increase’s impact

The different sectoral and farmers' organizations have already made their calculations. Asoprovac (Spanish Association of Beef Cattle Producers) quantifies the increase at 23% - taking into account from September 2020.

Román Santalla, director of livestock of the UPA association, values at 3 euro cents per liter of milk on average, "although depending on the regions it can even reach 5 cents". All of this is causing many farms, especially the smaller ones, to be abandoned, Santalla adds. "In the case of dairy cattle, my association calculates that between two and four farms disappear every day.  For COAG, the increase would be 30% for the pork sector. ASAJA, another farmers' organization, estimates the impact at around 26%.

Searching for solutions

Joaquín Peinado, general manager of Trouw Nutrition España, says: "We have experienced this situation before, for example in 2008, when we witnessed a convulsive mix of simultaneous events. Nevertheless, he is optimistic. "Of course, this situation can dampen our competitiveness a bit, but if we were able to cope with it together in 2008, I think we have the experience to do it now.

As for alternatives to alleviate the controllable part of the situation, there are several. Focusing on animal feed, for Jorge de Saja, from CESFAC, "the most obvious solution that we are already working on is the development and recovery of alternative raw materials which can be complementary with but never replace, traditional ones". In fact, he considers the recent EU authorization of insect protein use to be very interesting.

The ministry also points out several alternatives, in addition to the one already mentioned, such as the initiative to promote the National plant protein plan, in order to reduce the deficit that Spain has for both human and animal food. They also refer to the use of by-products from the food industry and old foodstuffs, within the framework of the circular economy. The same as to  research projects that allow their nutritional characterization as a source of nutrients for animal feed.

Agronomic improvements in raw material crops together with more automated dairy cattle management increase productivity and therefore have a positive impact on production costs.

Struggling with electricity price

The second factor which has such a decisive influence on the increase in production costs is the increase in electricity prices, which are reaching historic highs in Spain. According to ASAJA, "the average price per megawatt/hour last August was almost three times higher than in the same month of the previous year. We are talking about an average price of 36.21 €/MWh compared to 105.99 €/MWh".

The root cause is the increase in the price of electricity on the wholesale market, which, according to experts, is due to the strong revaluation of natural gas on international markets and the rise in CO₂. The most affected productions are the poultry and the dairy sector.

A commitment to renewable energies

As a measure to reduce production costs, more and more farmers are opting for self-consumption through the installation of photovoltaic panels. This does not put an end to dependence on the grid, but it does reduce the amount of the bill.

Román Santalla, from UPA and a dairy farmer himself, says that farmers need more aid to make this conversion. And it is foreseeable that this aid will appear thanks to the European funds which are arriving in Spain.

The Recovery, Transformation and Resilience Plan presented by Spain establishes measures, investments and reforms aimed at improving energy efficiency and promoting the use and development of renewable energy supply systems on agricultural and livestock farms.

Several scources