Andersons warns cost inflation to hit profits

• The coming year could see farm profits come under significant pressure
• Cost inflation will continue to be high whilst output prices may weaken due to an economic slowdown
• This is the overall message from Andersons Outlook 2023 which has just been published

Cost increases have been the big topic in farming in 2022 and it looks set to be the same in 2023.  Andersons are predicting that total UK farm profits in 2022 will fall compared to 2021, but ‘only’ by 15-20%.  This is because of two main factors.  Firstly, rising costs will be partly offset by rising income – driven by high prices in two of the biggest sectors – dairy and combinable crops.  Secondly, the full effect of cost increases will not have been felt, even in 2022.  Much fertiliser was purchased at low(er) prices in 2021; electricity prices only started to peak this autumn; and many costs linked to general inflation levels in the economy (such as labour) take a while to catch up with the unexpected surge in price levels.

Profits will also be affected by changes in support.  In England, the Agricultural Transition sees the BPS cut by a minimum of 20% in 2022 compared to 2020.  Although the money is to be ‘recycled’ through other schemes, it is not clear it is all going to be spent this year with the gradual rollout of ELMs.  Furthermore, whilst the farm support budget is guaranteed until 2024, it is fixed at current prices – with a high rate of inflation, the real term  value of it drops quite quickly.

Looking to 2023, the forecast is sobering.  Higher costs in some areas seem ‘baked in’, for the short-term at least, with no signs that energy prices are going to decrease whilst the Ukraine conflict continues.  In other areas, such as the wage rates for seasonal workers, the 15% increase in 2022 is irreversible.  There will be inflationary pressure on many other inputs as individuals and businesses put up prices to try and keep up with inflation.

Output prices in some sectors may also weaken.  In the arable sector global markets will have had more time to adjust to the restrictions on Ukrainian exports (or, indeed, shipments may increase in volume).  Demand, both globally and in the UK could decrease for some commodities if there is an economic downturn and consumer spending falters.

Andersons forecast for 2023 currently sees UK farming profits dropping by up to a third.  This puts them back levels last seen in the difficult years around the turn of the millennium.  These forecasts only look at the aggregate position for the whole UK farming industry.  There will be huge differences between sectors and, indeed, individual businesses depending on how costs and income changes interact.

Although the immediate future looks challenging, it should be remembered that the farming sector has faced difficult times before and has come through them.  2023 marks fifty years since the founding of Andersons the Farm Business Consultants – then David Anderson and Co.  It is easy to state that the agricultural and food industries are ‘unrecognisable’ from the early 1970’s.  Indeed, there has been huge change in many areas.  There is a special ‘anniversary’ article in Outlook 2023 comparing 1973 with today which highlights some of these.  However, the fundamentals perhaps have not change as much – the desire to grow good crops, raise healthy livestock, look after the land, and pass something worthwhile on to the next generation.