Agflation has Peaked, but its Corrosive Effects Linger

After rising sharply since 2021 and peaking in July 2022 at 28.4%, agricultural inputs’ inflation (Agflation) has been in free-fall during the first half of 2022 and has become deflationary. The latest estimates suggest that agricultural input prices in May 2023 are 3% lower than in May 2022. Agricultural output prices have broadly mirrored the trend for agricultural inputs and have also become deflationary, currently standing at -2.3%. This is in sharp contrast to food prices (depicted by CPI Food), which in May 2023 are estimated to have risen by 18.7% year-on-year.

Although, it appears that food prices for consumers are continuing to rise whilst agricultural prices are falling, importantly, there is a lag between how agricultural prices evolve and how these prices are reflected in retail prices. Back in 2017, when agricultural output prices reached their highest point in May of that year (at 13.2%), the CPI Food index did not peak until the following November (at 4.1%). This reveals a lag of about 6 months and indicates that the highest extent of inflation in food prices was significantly lower than for agricultural outputs. A key reason for this is that agricultural raw materials are one of several inputs that go into supplying food to consumers. Other inputs such as labour, energy, and packaging are also significant, and traditionally are much less volatile than agricultural prices.

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.

That said, the combined effects of Brexit, Covid and the Russia-Ukraine conflict have exerted multiple pressures on both agricultural commodities, labour and energy inputs meaning that recent CPI Food inflation has almost reached 20%. However, there are signs that food price inflation might have peaked in March 2023, about 7 months after agricultural output prices had done similar.

Furthermore, although the chart above shows that inflation is trending downwards, it disguises that agricultural and food prices today are substantially higher than they were two years ago, as the indexed chart below shows. Agricultural input prices are 24% higher, agricultural outputs are up 15% whilst food prices are up by 29% in that time. In this time, prices elsewhere in the economy, denoted by the CPI index are also up by 18%. This reveals the corrosive pressure that inflation exerts on consumers’ incomes. Understandably, workers will seek pay rises to mitigate these increases. This, in turn, will mean that inflationary pressure across the economy generally will continue to linger, especially as annual inflation (8.7% (CPI)) remains way higher than the Bank of England’s 2% target.

Indexed Chart of Agricultural Inputs, Outputs, Food Prices and CPI – 2015 to 2023

Sources: ONS, Defra and Andersons

With consumer incomes under pressure, there is even greater focus on food prices and, by implication, the prices that farmers receive. All the while, farmers too are contending with their costs being significantly higher than two years’ ago. This signifies further challenges ahead, at a time when recent Free Trade Agreements with Australia and New Zealand have entered into force. Although farmers in those countries have also had to contend with inflationary pressures, it suggests that a delicate balancing act will be needed so that British prices remain competitive, whilst permitting farmers to cover the significant cost increases that they have experienced in the past two years.

Indeed, a key reason why agricultural inflation has come down is because the annualised figures compare with a given month a year earlier, a period when the world was adjusting to the shocks caused by the start of the Russia-Ukraine conflict. When annual inflation is compared to a period after which costs had increased considerably, it is unsurprising that the rate of increase has slowed, or turned negative in the case of agflation.

In such times, it is more important than ever for farmers and those that transact with farmers to be aware of the costs that farmers face. The Agricultural Budgeting and Costing Book contains all the farm and rural business information you need in one publication. It is concise, clear, and easy-to-use. The information is updated every six months, so you are always using the most relevant data, something which is especially vital during inflationary periods. The contents include;

  • Fully updated gross margins for all farming sectors, crops, and livestock, including net margins for key enterprises.
  • Sensitivity analysis and discussion of market prospects.
  • The widest range of information on alternative enterprises, diversification, and non-farming income sources available in any UK publication.
  • Explanation of the support systems and grants across GB, including BPS rules and rural grants. An outline of post-Brexit farm policy.
  • Farming costs including forage, feed, fertiliser, and pesticides.
  • Overhead cost data covering machinery, labour, contracting, building costs, and rents.
  • A vast array of general reference information for the farming sector.

For nearly 50 years, The Agricultural Budgeting and Costing Book has been providing industry leading farm management and costings information to agricultural advisors across the UK and is the leading publication of its kind in the industry. The 96th Edition, or an annual subscription (2 editions) can be ordered via The Andersons Centre website – https://theandersonscentre.co.uk/shop/

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Notes:

No. of Words: 966

Authors: Michael Haverty and Richard King

Date: 21st June 2023

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. 

Cost of Farming Squeeze Continues

Agricultural inputs’ inflation (Agflation) continues to outpace general economic inflation (CPI) as well as agricultural outputs and food prices (denoted by CPI Food). This is the key finding of Andersons’ Agflation estimates for January. The latest estimates put Agflation at 18.7% annually, significantly ahead of agricultural outputs (11.1%). Although the CPI and CPI Food indices continue to rise, currently standing at 10.5% and 16.8% respectively, there is still a gap between the food price inflation that consumers face and the increased input costs that farmers must manage. Therefore, UK agriculture continues to experience a cost of farming squeeze.

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.

Although Agflation remains higher than food prices, it is declining. In July 2022, it peaked at 26.3%. That said, throughout 2022, agricultural input cost inflation generally surpassed price rises for agricultural outputs. The only exception came in October and November when both indices were aligned. During December and January, the agricultural outputs’ inflation rate has more than halved, declining from 22.9% in October to 11.1% today. It is now 7.6 percentage points lower than agricultural inputs’ inflation.

This signifies a challenging period ahead for farmers as the gap between input cost rises on the one hand and output prices on the other continues to widen. Global Dairy Trade (DGT) auction prices, taken as a proxy for global milk prices, have declined by 6% in the past month. Feed wheat prices (£213/t) are also down by 6% versus December and are returning to levels seen this time last year when prices stood at £210/t. The implications of these trends will require careful consideration.

Whilst general economic inflation looks to have peaked and several commentators are forecasting that the inflation rate will decline significantly during 2023, food prices continue to rise. This should not come as a surprise at this juncture because there tends to be a lag between the rates of inflation for agricultural commodities (inputs and outputs) and the inflation rate for food prices. In the past year or so, this has been in the region of 6 months. With agricultural inflation peaking in July, one would anticipate that the CPI Food index will also peak shortly, if it has not already done so.

Inflation and the impact of the ‘cost-of-living crisis’ on UK agriculture will be key themes during the forthcoming Andersons’ Spring Seminars on the Prospects for UK Agriculture which will be taking place across 11 UK venues from 24th February. The Seminars will examine UK farming’s profitability and performance, upcoming farm policy changes, trade, inflation and the impact of the cost-of-living crisis. They also provide sector-by-sector analysis and profitability outlook for the farming industry. Andersons’ Seminars have been running for 26 years and are renowned across Britain for informing agri-food professionals on how the industry is set to evolve in the next year and beyond, and the implications thereof for organisations serving the sector.

Despite the inflationary pressures that UK farming is facing, we have held the cost of the seminars at the same level as last year. Furthermore, if you book online via you will receive, via e-mail, a bonus complimentary copy of our most recent Professional Update bulletin (worth £50). More information including booking details is available via: https://www.theandersonscentre.co.uk/seminars

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Notes:

No. of Words: 658

Authors: Michael Haverty and Richard King

Date: 31st January 2023

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. 

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 based on updated data for July 2022 now stand at 12.8% and 10.1% 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 2022

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: 596

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.