Cost of Farming Squeeze Apparent

For the first time, Andersons’ Agflation estimates include an index of Agricultural Outputs prices. The July estimates put Agflation at 23.5% annually, more than double that of agricultural outputs (10.1%). When Agflation is plotted against output prices, food inflation (denoted by CPI Food) and general economic inflation (CPI), which stand at 9.8% and 9.4% respectively, it becomes apparent that there is a cost of farming squeeze taking place.
In the months preceding June 2022, agricultural output prices generally rose in parallel with Agflation, albeit at a slightly lower rate. However, since then, these indexes have diverged considerably. Whilst recent falls in commodity grain prices have been the main driver, it also suggests that consumers are struggling to afford rising food prices and, that retailers and food service providers are reluctant to pass on further increases. With energy prices set to rise further towards winter and the Bank of England projecting that inflation will rise to 13% by year-end, the extent of the challenges facing the UK economy are stark.

Andersons ‘Agflation’ and UK Consumer Prices Index (CPI) – 2015 to 2023

Sources: ONS, Defra and Andersons

Notes: Andersons’ Agflation index builds upon on Defra price indices for agricultural inputs and weights each input cost (e.g., animal feed) by the overall spend by UK farmers. Andersons then provides a more up-to-date estimate of the price index for each input cost category.   The Agricultural Outputs index is compiled in a similar manner. Defra price indices for agricultural outputs are weighted based on their overall contribution to UK farming output. Andersons then provides more recent estimates for each output category, with the index being updated as the official Defra data becomes available.
* represents the % change versus the same month a year earlier.

Rising energy prices will also continue to affect Agflation in terms of fuel, fertiliser and feed costs. Therefore, Agflation will remain at elevated levels for this year and beyond.
Some sectors are better positioned to withstand these increases than others. Milk prices are up by 41% since July last year. Cereal prices, although lower recently, are still around 29% higher than a year ago. However, livestock prices, generally up 10-19%, are not rising as quickly as Agflation, with egg and fresh vegetable prices falling. Several of these sectors have been struggling in terms of profitability. Additional inflationary pressure on inputs will stretch working capital resources further.
Although advance BPS payments in England during July are welcome, BPS payments are declining and will by 35% lower in 2023 than in 2020. Successor schemes including the Sustainable Farming Incentive (SFI) will not bridge the income gap. If farmers are unable to get higher prices for their outputs, many will be severely squeezed in the months ahead. Difficult decisions will need to be made on cropping and enterprise viability. This will have direct implications for food supply, coming at a time when severe droughts are being experienced elsewhere, particularly in Europe.
In such times, having access to the latest available information likely to impact farmers’ decision-making is crucial. Inflationary challenges, and other key issues affecting UK farming, will be examined in much more detail during Andersons’ forthcoming Webinar, taking place on 22nd September. Tickets are priced at £70 per place, the agenda is set-out below and places can be booked by visiting: https://register.gotowebinar.com/register/3842561566295604752 

Agenda – UK Farming Prospects – Autumn Update

  • Farm Profitability and Finance Performance
  • Trade Update
  • Farm Policy Updates – England, Scotland and Wales
  • Sector Updates
    • Arable
    • Dairy
    • Grazing Livestock
    • Pigs and Poultry
  • Summary and Conclusions

Ends.

Notes:

No. of Words: 592

Authors: Michael Haverty and Richard King

Date: 10th August 2022

This news release has been sent from The Andersons Centre, 3rd Floor, The Tower, Pera Office Park, Melton Mowbray, Leicestershire LE13 0PB. For further information please contact Michael Haverty on +44 (0)7900 907 902 or Richard King via +44 (0)7977 191427. 

Agflation Remains at Decades’ High Levels

Andersons’ latest estimates for June show that Agflation now stands at 25.3%. Since the onset of the Russia-Ukraine conflict in February, input costs have soared and are at levels which have not been seen in decades.

Andersons’ Agflation index builds upon on Defra price indices for agricultural inputs and weights each input cost (e.g., animal feed) by the overall spend by UK farmers. Andersons then provides a more up-to-date estimate of the price index for each input cost category. As the ‘official’ Defra figures are updated, Andersons Agflation estimates are also adjusted to take account of the Defra updates.

In comparison with general inflation, as measured by the consumer prices index (CPI) and food prices (CPI Food) which stand at 9.1% and 8.5% respectively, Agflation is nearly three times higher. Given the current situation with the Russia-Ukraine conflict and the upheaval caused across numerous commodity supply-chains, particularly feed, fuel, and fertiliser, Agflation is set to remain at elevated levels for at least the remainder of this year.

Andersons ‘Agflation’ and UK Consumer Prices Index (CPI) – 2015 to 2023

Sources: ONS and Andersons

Notes: Andersons’ Agflation index builds upon on Defra price indices for agricultural inputs and weights each input cost (e.g., animal feed) by the overall spend by UK farmers. Andersons then provides a more up-to-date estimate of the price index for each input cost category.
* represents the % change versus the same month a year earlier.

Due to the surging input costs, many farm businesses are feeling a severe squeeze on margins. Thus far, some sectors have been better able to withstand the inflationary storm than others.

The arable sector is less affected for 2022 as most farmers have bought forward their fertiliser and output prices have hit record levels (although this contributes to feed cost rises for livestock). For many farmers in this position, 2022 is shaping up to be a stellar year – the value of the unharvested wheat crop has risen by more than 50% since it went in the ground. That said, challenges loom for 2023. High input costs and taxation on 2022 profits will stretch working capital requirements.

As alluded to above, the livestock sectors are under additional pressure due to the burden of increased feed costs, which account for nearly a quarter of the weighting for the Agflation Index. Whilst pig prices have risen, they remain insufficient to cover the soaring production costs that pig farmers have had to contend with in recent months.

Dairy and livestock farms have also been feeling the strain. The dairy sector has seen some significant price rises in recent months, partly because UK milk production volumes are down, and processors and retailers are trying to encourage farmers to boost their production to meet with consumer demand. This will help the dairy sector to mitigate some of the inflationary strain.

These severe inflationary pressures are occurring at a time when all farms in England are facing cuts in BPS payments, which will reach 35% during 2023.

In such times, it is crucial to demonstrate competent cost management, particularly in terms of working capital, which will be essential to steer farm businesses through the current crisis.

To celebrate the John Nix Pocketbook becoming part of The Andersons Centre’s publications portfolio, and as an antidote to inflation, we are offering a 10% discount on all purchases of the 52nd Edition of the Pocketbook. To avail of the discount, simply click the link below and apply the discount (coupon) code “PKB5210” during the checkout process. Offer is available while stocks last. Please visit: https://theandersonscentre.co.uk/shop/john-nix-pocketbook/

Ends.

Notes:

No. of Words: 602

Author: Michael Haverty

Date: 28th June 2022

This news release has been sent from The Andersons Centre, 3rd Floor, The Tower, Pera Office Park, Melton Mowbray, Leicestershire LE13 0PB. For further information please contact Michael Haverty on +44 (0)7900 907 902.