UK farming has been making a profit without the help of subsidy for the past two years – but this could all change if grain prices remain subdued and the single farm payment is cut.

Addressing the Andersons‘ spring seminar Opportunities in a Changing Agriculture, head of research Francis Mordaunt explained that the Total Income From Farming (TIFF) in 2008 and 2009 had topped £4bn, clearing the £3.8bn received in direct and agri-environmental payments.

“The weakness of sterling has helped all sectors for the past two years and is pulling up the TIFF,” he said.

Mr Mordaunt suggested that TIFF should exceed £4bn again in the UK for the next two years – providing farmers with a much needed opportunity to reinvest.

“But the cereals prices has weakened again since we went to press with these figures,” he told the seminar. “If we were revising them today, then I think we’d be looking at less than £4bn for 2010 and 2011.”

Beyond that, he predicted that cuts in the single farm payment would also bite. “We expect the single farm payment to be reduced post-2012 following the next CAP reform – possibly by quite a lot,” he said. “If that is the case, then we could soon be back in a position where there is no profit at all.”

Analysis of the individual sectors showed that cereals, general cropping and dairy farms had all seen incomes drop in 2009 due to lower prices. But grazing livestock farms had increased their returns, with a farm business income of about £25,000 on average.

The biggest income gains, however, were for pigs and poultry. “The pig sector has had the longest period of continuous profitability in my career of 42 years,” said Mr Mordaunt. “It is possible that the pig cycle could be a thing of the past.

Despite the problems faced by the arable and dairy sectors in particular, Mr Mordaunt believed agriculture was in a good state overall. Borrowing had dropped back since peaking at £11bn last autumn and was comfortably within the £14bn credit limit assigned by the banks.

“Banks have increased the amount they are prepared to lend to agriculture at a time when most other sectors have seen their lending limits cut,” he said.

The weakness of sterling was also continuing to benefit the sector. “It is always dangerous to predict exchange rates, but it seems that the pound has moved into a different trading band from that which it was in during the early years of the single currency.”

Mr Mordaunt said that, with the UK economy as weak as the Eurozone economies, he did not see much strengthening of the pound this year.

* For more on this story see Phil Clarke’s Business Blog. And why not try our farming acronym test?