Farming’s future

Transition pressures intensify

“The cost of farming is becoming substantially more expensive”

Graham Redman

“Farming continues to go through a period of significant change, with a long-term transition in land use to food production alongside environment, diversification and delivery of public goods”

Richard King

Pressures on UK farming are intensifying, as Charles Abel reports

Figures correct at time of writing

FARMING faces increasingly turbulent times as Putin’s diabolical Ukraine war piles pressure on supply chains still fragile post-pandemic. Combined with swingeing farm support cuts, Brexit-related trade and labour issues, new Government policies, and evolving societal demands the pressure for major farming restructuring is intensifying.

As Russian atrocities in Ukraine wreak an awful human toll, trade repercussions have sent farm input costs soaring, placed world food stocks under fresh scrutiny and accelerated moves to deglobalize supply chains, as reported in January (FCJ 292).

So whilst many farms made good returns in 2021/22, thanks to stronger post lockdown-driven retail sales, the short, medium and long-term picture is challenging, warns farm business consultancy Andersons.

Alongside price spikes, farm incomes, already under pressure from Basic Payment Scheme cuts in England, now face considerable pressure from rising input costs and surging interest rates. The £:€ exchange rate also remains relevant, influencing the cost of imports and value of exports.

Earlier this year agricultural inflation at 12% was double the rate of consumer inflation (5.5%). That was before Putin’s military onslaught sent energy costs soaring. By late March, with nitrogen pushing £1000/t, agflation topped 30%, consumer inflation hit a 30-year high 6.2%, and further surges were anticipated.

With exports from the farming powerhouses of Ukraine and Russia in jeopardy, and world stocks, especially in China, under pressure, grain prices escalated, piling pressure on livestock farms with a £3040/t hike in feed costs in March alone.

In the medium-term BPS cuts will bite even harder, down 50% by 2024 and hitting zero in 2028, in England, with enviroschemes replacing only a proportion of the income lost on most farms, says Andersons.

Longer term government policy, in England especially, will continue to focus on changing land use to better meet environmental and climate change goals. “The UK government does not see food self-sufficiency as key goal; it believes food security is better achieved by sourcing from multiple markets, not having all its eggs in one basket,” says Richard King, head of research at Andersons. In any case UK food supply already draws on a land area twice the size of the UK.

Growing north/south policy divergence will see Scotland and Northern Ireland maintain direct payments, at lower levels, while England (already) and Wales (from 2025) pursue public goods.

Farm profits

To spotlight the finances in different sectors Andersons runs business models each year, for dairy, mixed livestock, upland and arable farms. The data tells a stark story of transition from generally strong results last year. Total farm income in 2021 probably topped £6bn, thanks to stronger commodity prices, but 2022 is set to dip below £5bn, as input costs soar and BPS is reduced, it notes.

The data shows a typical dairy farm achieved a surplus of 5.2ppl for the milk year ending this March, when BPS is included. That is ahead of 2020/21, thanks to milk price rises generally matching rising input costs. But it is unlikely to continue, with an anticipated 56% rise in variable costs, plus higher overheads and BPS cuts eroding the surplus to 2ppl in 2022/23.

Exceptionally, for the first time in over a decade, mixed farms with a strong focus on beef and sheep should record a pre-BPS profit in 2021/22, largely thanks to strong meat retail sales during the pandemic. But even if prices remain strong, as expected, soaring input costs are expected to turn that small £31/ha pre-BPS profit to a hefty £202/ ha loss in 2022/23. Factoring in BPS cuts this year’s £273/ha profit to just £5/ha next year.

Worse still, upland farms, predicted to make a small loss this year, can expect losses of over £165/ha next year before BPS, due to rises in fertiliser, feed and fuel costs, translating to a £28/ha loss with reduced BPS.

“This is the most vulnerable sector, especially beef, and is feeling the pinch the hardest,” says Andersons’ Graham Redman. “Most farms in the sector are BPS dependent, so will see the biggest structural changes over the coming years. These farms are all very different, so there’s no cookie-cutter answer. But they really do need to do something.”

Breakeven prices also remain elusive in pig and poultry, prevented by feed, labour, slaughter and supply issues in pigs, and bird flu and feed costs in poultry. Lack of a premium for higher welfare products is a further problem.

For arable the key for the current harvest year is the timing of grain sales and input purchases, typically resulting in a pre-BPS margin of £325/ha. Forward sellers won’t have benefited from higher prices, but early input buying avoided price spikes too.

Next year’s scenario broadly reverses, so strong sales values need locking in and top input costs avoiding. Even so, pre-BPS margin could drop to just £30/ha, leaving arable making low profits without subsidy, Mr King notes.

Cashflow and working capital will be at a premium. “Finance facilities may need doubling or even tripling to support purchases, and new ways of selling will be needed to protect against inflation, maybe sourcing inputs early and backing that off with a sale that secures a margin,” says Mike Houghton of Andersons Salisbury.

Medium-term BPS cuts

Deeper challenges also need addressing, especially in England, where all BPS payments will taper to zero by 2028.

Instead, Defra support will switch to 10% for productivity schemes, 60% for Local Nature Recovery and Landscape Recovery schemes, and 30% for the broader Sustainable Farming Incentive, with the overall budget agreed with HM Treasury – and probably smaller than now.

Andersons analysis suggests the schemes will not replace lost BPS income. SFI, for example, may boost 2023 net income, but far below BPS cuts, and will have costs in 2023. Subsequent SFI options may be more worthwhile, for some, but will not match lost BPS income.

“Can profits from farming increase to offset BPS cuts,” asks Mr King. Improved efficiency, rent reviews and other income sources will be important. “The next 5-10 years will be a period of significant change, with the speed of structural change accelerating. Some will need to exit, which will free land for others. Having a plan to prosper during this period of change is vital.”

Policy drivers

Longer-term Defra is keen to boost farm productivity, so land can be freed for a wide range of other public good purposes. A fifth of England’s farmland currently contributes just 3% of the calories, for example. Indeed, with 21% of the UK in rough grazing and woodland, and 26% in permanent grass, it is the 25% in temporary grass and arable that generates over 90% of farm output.

Land sales and prices are already rising, as competition for non-farming uses grows. That helps sustain the sector’s £325bn balance sheet, and helps land-owners, who benefited more from capital growth than farming over the past 20 years.

“Agricultural transition is impacting very significantly and quickly, especially in England. Farms need to ensure they have a strategy,” concludes Mr Houghton.

LAND USE CHANGE TO 2030

Cereals (feed)

Less meat, more grass-based

Cereals (human/fuel)

Biofuels

Oilseeds

Little change

Peas & beans

Plant protein demand

Hort/roots

Labour constraints

Temp grass

Grass in arable rotations

Perm grass

To enviro uses

Rough grazing

To enviro uses

Biodiversity uses

ELM, BNG, rewilding etc

Diversification

Solar PV + leisure

Woodland

Carbon + amenity

Wetlands (peat)

Restoration

Source

The Andersons Centre

SFI UPDATE

Initial Sustainable

Farming Incentive

payments, paid quarterly in arrears, and probably field-by-field, will come with 3-year agreements for introductory, intermediate and advanced levels, for arable soils, improved grassland soils, moorland and rough grazing, and animal health and welfare, with an application window opening this Jun/Jul and year-round thereafter, says Andersons. Integrated pest management, nutrient management and hedgerow options are expected for 2023, and more options in 2024 and 2025. “Agreements will be subject to 12-monthly reviews, so you can change things yearly – but you will only be able to add things, not take land out or drop to lower standards,” notes Mr King.