Outlook 2024: Economy and profitability for agriculture

UK economic growth has been slow since the financial crisis in 2007-09. Barely had the UK recovered when the impact of Brexit began to hit.

This, the Covid-19 pandemic and the war in Ukraine have arguably given the UK economy a harsher battering than most countries, says Andersons partner Graham Redman.

The current problems of high inflation, public debt and stagnant growth are particularly painful. While it won’t escape unscathed, farming looks reasonably well placed to cope with these challenges.

See also: Delinked payments: Advice on transfers, land sales and FBTs

The costs of borrowing have gone up in the past year. Agriculture’s overall borrowing is low relative to its asset value, with the majority of debt held by an estimated 20% of farmers, some of whom are now overstretched.

Much of this borrowing is on fixed rates, but we expect most people will switch to variable rates as terms end, given that incentives to refix have gone.

A small number of farmers who either gambled too hard or did not reflect on the implications of higher rates will lose.

Base rates, energy and labour

Base rates may not have hit their highest point, with inflationary drivers still pushing hard. Labour is still stretched.

More widely, as we noted last year: “It is an employees’ market; salaries are protected while dividends are not, and strikes are therefore inevitable.” This scenario looks set to continue into 2024.

The pound has been weak against other major currencies, adding to inflation through higher import costs.

A weak pound might be good for export volumes, including farm goods, but global trade has been slowing due to Covid and conflicts, both military and trade.

Energy prices have been another driver of inflation. Oil prices, after falling, are heading back up. Conflict in the Middle East could cause this trend to continue.

A harder winter will also create higher demand for gas and a resurgence in prices.

Emissions challenge

There is also the challenge of making the transition to low-emissions business and lifestyles. Limited direction on achieving it is hampering innovation and creativity in the economy.

An economy-wide carbon tax is generally believed by economists to be the most efficient way to tackle emissions.

This would be easier to implement with international co-operation. However, the biggest issue is that it puts pressure on the consumer, which is politically challenging.

Many commentators and industry influencers believe agriculture is being sidelined by government and the gradual reduction of government funding (in real terms) is proof.

However, Defra’s Total Income from Farming (Tiff) figures show 20 years of gradually increasingly profitability in real terms, which arguably suggests the farming industry does not need as much support as before.

For many, new agricultural policy throughout the UK will return less profit, but the concept of public goods for public money is acceptable to taxpayers and voters, making it more sustainable.