Profits squeeze will hasten structural change in farming

Costs are lower in general than a year ago, but still at elevated levels, while output values in several sectors are down considerably.

UK farming is likely to see big structural change in the next five to 10 years and 2024 may be the year when changes “hit home” in England, says consultant Andersons, with slightly more relaxed timing in Scotland and Wales.

The most challenged sector over the next five to 10 years is expected to be grazing livestock, followed closely by combinable cropping farms.

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This prediction results from the reliance on subsidy in the grazing livestock sector, made up mainly of smaller farms, with combinable cropping holdings also having been high subsidy recipients in the past.

The firm’s latest analysis and sector budgets show the impact of persistently high and rising inflation, especially on overheads, while output prices have been falling in key sectors such as dairy and cereals.

Inflation is also eroding the real-terms value of direct support. The shift from high to more “normal” profits will challenge cashflows, especially in respect of tax and working capital demands, with the cost of borrowing having tripled in a short time frame.

England’s Sustainable Farming Incentive (SFI) is starting to provide limited cash support, but will not displace the guaranteed income of the Basic Payment Scheme (BPS).

Agflation, Tiff outlook and impact of inflation

Andersons’ “agflation” index shows that, over the past couple of years, the rise in the cost of inputs has been matched to a large extent by similar rises in farmgate selling prices.

However, recent falls in milk and cereal prices have led to a divergence, with the inputs index rising in summer 2023 while the outputs index is falling.

“This divergence puts profits under pressure,” says Richard King, head of business research at Andersons. 

Defra’s Total Income from Farming (Tiff), measuring the aggregate profit of the UK farming sector, shows record returns of almost £8bn for 2022 when, in general, sale prices were high and cost increases had not fully come through.

Updates to these Defra figures are common and Andersons expects the 2022 profits figures to be revised down.

The firm estimates Tiff for 2023 and 2024 will be back in the “normal” range of £5bn-£6bn, with 2023 at just under £5bn and representing a fall of about 40% compared with 2022.

“It won’t feel as good as it has been, but it won’t be a disaster,” says Richard.

Farm borrowing and saving

Real-terms farm borrowing rose after the 2008 crash then plateaued for about five years between 2016 and 2021.

Since then, 2021 and 2022 profits in many farm businesses have given the scope to reduce debt.

The cost of finance has almost tripled in a very short space of time and while many farms borrow little or nothing, the rapid rise in the interest burden is already challenging some of those other businesses.

Scotland and Wales

BPS remains the main source of farm support in Scotland and Wales for 2024, with little change.

“Conditionality” requirements become part of a successful BPS claim from 2025 in Scotland, requiring farmers to take action relating to greenhouse gas emissions, biodiversity, animal health and welfare and other areas.

More detail is expected on the conditionality rules early next year, while 2026 will see the start of the introduction of a new four-tier structure of farm support for Scotland through to 2027, with a base payment and top-ups for different actions.

In Wales, the Sustainable Farming Scheme (SFS) replaces the BPS and Glastir from 2025, with a three-layered payment, starting with universal requirements of 10% woodland on farms, habitats, soils, animal health and other obligations.

The next layer will offer payments for actions to enhance the environment, and the third layer will reward collaborative action.

“The current proposals ask quite a lot from farmers [for a potentially low payment]. It remains to be seen whether these requirements will be altered before the final scheme,” says Richard.

Updated budgets for Andersons’ model farms (see tables below) show the impact of the changes in input, output and support payments for England.

Arable

“Loam Farm” is a notional arable business, based on real-life data and has been running for more than 30 years, tracking the fortunes of combinable cropping farms.

It is a 600ha farm growing milling and feed wheat, winter oats, spring barley and spring beans. Oilseed rape was dropped some years ago due to its unreliability.

The farm is set to make a positive margin from production of the 2023 harvest but will see a big drop on the two previous years’ results.

It was an early adopter of SFI, earning £40/ha from this source in the 2023 harvest year and building on that to £83/ha in 2024.

While milling and malting premiums for the 2023 crop have risen, the gap between feed wheat and feed barley prices has widened as feed demand from pigs and poultry in particular has fallen.

Variable costs should fall further for the 2024 harvest, but with overheads continuing to rise, the budget for the second year running shows a profit of about a quarter of that from the 2022 harvest.

Dairy

GB milk price rises overshot where world markets would have said they should be through 2022, says Andersons, and despite the farmgate cuts in the first half of this milk year, improvements in wholesale dairy commodity markets will be needed to prevent further GB farmgate milk cuts through to the spring flush.

Andersons’ “Friesian Farm” model is a notional 200-plus cow business in the Midlands with a constituent basis milk contract. It has year-round calving and is trying to maximise yield from forage.

The firm’s estimate for the current milk year reflects the big drop in prices so far, with further price pain to come factored into the average for the year as a whole, resulting in a negative margin from production despite lower costs.

Typical of most dairy holdings, this farm has not yet committed to the SFI. The 2024-25 estimate includes some further variable cost reductions and what Andersons terms a “normal” milk price, putting the farm just into positive margin territory.

Beef and sheep

Andersons’ “Meadow Farm” is a fictional 154ha beef and sheep holding in the Midlands, also growing wheat and barley mainly for feed. It has 60 spring-calving suckler cows and finishes all progeny, a dairy bull beef enterprise and a 500-ewe breeding flock.

In 2021-22, the farm made a margin from production for the first time in many years. The following year was much more challenging. Costs rose substantially, especially feed, and the farm made a loss of £208/ha from production, with a BPS cut putting the farm into an overall loss.

For the current year, 2023-24, high beef prices look like producing a higher livestock gross margin but a lower crop gross margin. Overhead costs continue to drift upwards and the farm again makes a loss from production, although smaller than the previous year’s loss.

The 2024-25 estimate year shows a further deterioration in the margin mainly through lower output prices and another BPS cut, resulting in a loss. This type of farm needs to examine the SFI for scope to recoup some of the “lost” BPS, says Andersons.