Rising input costs farmers’ toughest challenge for 2023

Expectations of further input cost increases and more static or declining output values are setting the tone for 2023, with British farmers feeling rather less optimistic about their economic prospects than they did a year ago.

Our annual Sentiment Survey, conducted in October/November and seeking the views of almost 600 farmers, shows that many are actually in reasonable financial shape.

As we reported in our 16 December issue, most farmers said 2022 was a “good” or “very good” year for them – despite the multiple challenges they faced.

See also: Farmer support for Tories waning as problems mount up

Arable farmers were particularly upbeat, having enjoyed another year of buoyant prices and decent yields, with many having bought their inputs before the real price spikes caused by the war in Ukraine.

Livestock and dairy farmers faced bigger challenges, with high feed and energy costs, and fodder shortages eating into margins more quickly.

Even so, about one-third still described the year as “good” or “very good”, while half reported it as “so-so”.

But the short-term outlook for all has taken a turn for the worse, with just 38% of respondents describing themselves as “optimistic” about the next six months compared with 42% this time last year.

It is not too difficult to work out why. Asked what their greatest challenge would be for 2023, the most common answer by far was “rising input costs”, with 37% of farmers citing this as their top concern.

This was followed by expectations of worsening market conditions for outputs, a continuation of  extreme weather patterns, changing government policy and limited labour availability.

Variations

Of course, feelings of optimism and pessimism about the year ahead varied between sectors, business situations and demographics.

Growers with oilseed rape in the rotation, for example, were among the most optimistic, as were those with renewable energy investments, and farmers growing sugar beet.

Conversely, poultry farmers were much more downbeat – a sentiment shared by potato growers, farmers with increased borrowings, and those in the 55- to 64-year-old age bracket.

The reasons for these differing opinions are not hard to fathom.

According to NFU senior economist Sanjay Dhanda, oilseed rape growers are probably still riding high on the stellar prices they saw at the back end of last season, when values topped £800/t in June.

“Even though many will now be seeing the full effect of higher input costs, the fact is many will have also locked into forward contracts for 2023 ahead of harvest, which secured that market upside,” he said.

The fact sugar beet growers are more optimistic probably relates to the price deal struck between the NFU and British Sugar in June.

It offers a 48% base price increase to £40/t for the 2023-24 contract year – plus various other options to help protect revenues and encourage production.

As for farmers with renewables, Mr Dhanda suggests this could fuel optimism as it will shelter them from the severe price hikes seen in the general marketplace for fuel and energy.

Those who have some surplus green energy to sell back to the grid may also see better returns on it in 2023.

Conversely, potato growers and horticulturalists have been hit hard by the hike in fertiliser costs and the tight labour supply, which will continue to dent returns in 2023, Mr Dhanda explained.

“We are looking at continued shortages of fertiliser throughout Europe, so markets will remain firm.”

Farmers with increased borrowings are also likely to be exposed to further rises in interest rates, as the Bank of England seeks to contain inflation, which is still in double figures.

Price expectations

It was no surprise to find further input cost rises on the cards, though the expectation for 2023 is that they will increase “slightly” rather than “significantly”, as was the case in 2022.

This suggests that some of the sting from this year’s 34% ag-inflation may be starting to ease – something that was certainly witnessed in wholesale gas prices during the autumn, as mild weather enabled suppliers to rebuild their stocks after the shock of Russia’s illegal invasion of Ukraine.

Red diesel values have also come back from the peaks earlier in the year, with current quotes putting it close to the 90p/litre mark, which is “only” about 20p/litre more than last year.

For livestock farmers, the gradual softening of the wheat market over the autumn months may have calmed expectations of continued feed cost rises. The opening of the Black Sea corridor will have been a factor in this.

Among the different farm types, cereal and potato growers were the most wary of “significant” further input cost rises (anticipated by 40% and 51%, respectively), primarily because of their dependence on chemical inputs, which remain bullish.

Beef producers were less concerned, with only 27% anticipating “significant” rises.

As for output values, the majority view was that they would probably “stay the same” in 2023, though there was still more “upside” than “downside”, with arable farmers more bullish than livestock producers about continued price buoyancy.