Ukraine war to squeeze farm margins as input inflation bites

Farming profitability is predicted to slide for all farm types in 2022 and 2023, as input cost rises bite and the gaps created by cuts to the Basic Payment Scheme (BPS) in England remain unplugged by the Sustainable Farming Incentive (SFI).

That is the somewhat gloomy prediction from farm business consultant Andersons, which has recently started its annual series of spring seminars, setting out the prospects for British agriculture.

See also: Ukraine tragedy renews focus on food security

Andersons’ own calculation of input costs shows that “agflation” has been rising at 10% a year in recent months, compared with 5.5% for the more general consumer prices index, and is expected to surge further ahead as the effect of the war in Ukraine is felt.

“The world has changed,” says Andersons partner and consultant Michael Haverty. “The Ukraine crisis has put renewed upwards pressure on everything, but especially fuel, fertiliser and animal feed.

“Whether any of this can be recouped by farmers depends on the extent to which consumers are able to pay more for their food,” he suggests.

But the likelihood is that the value of farm output will not keep pace, as the rest of the food supply chain and end consumers are already under pressure.

“Some significant headwinds have emerged,” says Mr Haverty, pointing to potential increases in interest rates as the Bank of England seeks to control inflation.

“This may have the dual effect of reducing consumer spending power and strengthening sterling – “and a strong pound is generally bad for UK farming profits,” he explains.

To illustrate these point, Andersons monitors the accounts for four hypothetical farms – Loam Farm (a typical lowland cropping farm), Friesian Farm (a 200-cow dairy unit in the Midlands), Meadow Farm (a medium-size lowland beef and sheep holding), and Uplands Farm (a 300ha unit with sucklers and breeding ewes).

In all cases, margins from production (before subsidies are included) are set to fall in 2022 and 2023 (see tables below).

Arable sector

The arable sector is as vulnerable as any. Trying to predict futures values for the coming season has been made a whole lot more difficult by the market turmoil triggered by the war in Ukraine.

Grain prices were already riding high, driven by the relatively low global stock situation, says Richard King, Andersons’ head of research.

These firm values had been expected to drive a global production recovery this season. “But given the war, this is probably not going to happen,” says Mr King.

Big doubts remain about whether the Ukrainian spring crop will even be planted, let alone harvested and shipped to the world market, suggesting 2022 may see a further draw-down of stocks, leading to robust prices.

While the margin calculations for the model farms were conducted before Russia’s invasion of Ukraine sent both input and output values spiralling upwards, Andersons sees the cost increases “coming home to roost” – if not in 2022, then in 2023.

“For everyone, it very much depends on when you sold your grain and when you bought your inputs,” says Mr King.

“The Loam Farm model assumes the farmer sells quite a lot of grain forward, so it will not have benefited so much from the post-harvest 2021 surge in prices,” he says.

“But many of the inputs had also been purchased early for 2022, so exposure to recent input cost rises is limited in this example.”

The real hike in costs is likely to hit the following season, Mr King suggests, with Loam Farm forecast to see its margin from production drop from £325/ha in 2022 to just £30/ha, as variable costs climb another 36% while overheads reach £500/ha.

Nitrogen fertiliser, in particular, is expected to have more than doubled in cost for applications this autumn, affecting the 2023 harvest.

“With high fertiliser costs, the inclination is to cut back on use,” says Mr King. “But if output values are high, it is not worth jeopardising yields.”

Further ahead, given that fertiliser is likely to remain expensive, Andersons predicts more of a switch to nitrogen-fixing crops such as peas and beans.

Livestock sector

Beef and sheep producers have been enjoying a relatively buoyant 2021-22, with firm prices helping producer margins.

Indeed, estimates for the hypothetical Meadow Farm show the mixed enterprise making a small profit from farming alone – before any direct payments – “the first time that has happened in a decade,” according to Mr Haverty.

The beef market has seen tighter supplies, including from the Republic of Ireland, while retail sales have grown at the expense of the food-service sector, which relies more on imports.

Sheep, too, enjoyed record prices in 2021, helped by tight supplies and an active takeaway market.

For both beef and lamb, prices are forecast to remain buoyant in 2022, though perhaps with some tailing-off towards the end of the year as the opportunity to procure more from Australia and New Zealand at reduced tariffs takes effect.

But this is not going to protect livestock farms from the damaging effect of rising production costs and overheads, be it on lowland or upland farms.

The projections for Meadow Farm – a notional 154ha farm with suckler cows, finishers, sheep and arable, producing grain for livestock – suggest production margins will fall from a small profit of £31/ha in 2021-22 to a hefty loss of £202/ha in 2022-21.

The outlook is just as bleak for Uplands Farm – a 300ha beef and sheep holding with 90 spring-calving sucklers and 800 ewes in the north of England.

Even with 2021-22’s buoyant prices, the farm is projected to make a small loss on its farming practices while, for next year, a steep rise in feed, fuel and fertiliser is expected to push this loss to £165/ha.

“Further cuts to direct payments mean the business surplus will be very small on our lowland livestock farm, and still negative on our upland livestock farm,” says Mr Haverty.

“Both will have to see if some of the lost BPS can be recovered from the SFI or other ‘public goods’ schemes, or else by modernising management practices.”