Surprising Farm Income Figures

May 1, 2014 12:00 am

A rather surprising set of farm income figures just released calculates that UK agricultural profitability increased by 13% in real terms in 2013. The latest Total Income from Farming Figures (TIFF) from DEFRA for the last calendar year show an increase to £5,464m from £4,834m – an rise of £630m in real terms. (At current prices the uplift is 15%). This means the 2013 year was only slightly less profitable than the 2011 year – which stood head-and-shoulders above any year in the past decade and a half. To us, this seems a rather unbelievable outcome, knowing what the results of many individual farms looked like in 2013. The TIFF figures have a history of revision, and we think that the latest 2013 statistics may undergo some revision.

TIFF shows the total profits from all farm businesses in the UK on a calendar year basis. It is the return to all the entrepreneurs in agriculture and horticulture for their labour, management and capital invested in their businesses. The series has been running for over 40 years and is generally regarded as the benchmark for the financial health of the sector.

Following various revisions, the 2012 year shows a 12% real-terms reduction on the 2011 high-point. This is not surprising given the wet weather through the ‘summer’ that year. In fact we had been forecasting a larger drop – perhaps by as much as a fifth, to below £4.5bn. The expected revisions have not materialised and the figure for 2012 is stated at £4,834m – not far from the original DEFRA estimate of a year ago.

Profitability for 2013, as illustrated by TIFF, shows a marked improvement over those for 2012. This is exactly the opposite of what we had been expecting. Our forecast for a drop was based on the late, cold and wet start to the year – pushing up costs and lowering output in sectors such as dairy and sheep. In addition was the hangover from the wet autumn of 2012, meaning a larger area of uncropped land and much more, low output, spring cropping. This is where some questions over the figures start to creep in. For example, harvest 2013 produced a lower volume of cereals than 2012 (this is from DEFRA’s own statistics). We know that prices were generally much lower in 2013 than 2012. Yet the TIFF figures have cereals output in 2013 up around £170m. Odd.

In another example the latest TIFF figures show output in the dairy sector up by over £0.5bn or 13%. Although 2013 was undoubtedly better than 2012, the start of the year was poor in terms of output thanks to the weather. Milk prices only started to take off in the second half of the year. Therefore this level of increase looks a bit strong. There is also a major increase in potato output for 2013 (up 29%) which looks slightly strange.

Some other major changes are more explicable. Poultry output rose in 2013 thanks mainly to higher prices. There was also a big increase in feed costs due largely to higher volumes used. In terms of costs, another oddity was that consumption of fixed capital (aka depreciation) actually fell compared to 2012. In light of the significant investment in machinery, equipment and buildings undertaken over the last 12-18 months, it might be thought that this charge would be increasing.

Looking to the current year, we would certainly have expected the 2014 TIFF to be higher than 2013. But given the latest statistics for 2013, any increase would mean that this year’s profits would be above those in 2011, and the highest returns since the mid-1990s. It doesn’t feel that profits in the industry are perhaps quite that good at present. Of course, there may yet be some revisions in the 2013 figures. We would expect them to come down for some of the reasons outlined above, but we may be proved wrong. The chart below shows TIFF in real-terms dating back to 1990. The DEFRA figure for 2013 is shown, with a shaded area showing possible revisions – we feel the figure might well be nearer £5bn if not lower. Our estimate for 2014 is for an 8% increase from the (lowered) 2013 profit.

UK TOTAL INCOME FROM FARMING – 1990 To 2014 (Real Terms) – Source:DEFRA