Better grain and milk prices are likely to push farm profits back above £4bn in 2008, a level not seen for 12 years.

But to achieve that, the industry could not rely on outside factors, said Richard King, a partner at farm business consultant Andersons. Instead, it still had to focus on optimum output using minimum effective inputs.

“Making a profit is still going to be a challenge the danger is that any improvement in prices is simply swallowed up in higher costs.”

The £4bn figure – 30% above likely 2007 income – depended on steady milk prices and grain values slipping only slightly after the 2008 harvest, he said at the recent launch of the firm’s Outlook 2008 publication in London.

A beneficial exchange rate would also help. Andersons had long used 68p to the euro. “But it looks like the euro might be making a more fundamental shift up to 72p or even beyond. That makes us more competitive in Europe and increases the value of the single payment.”

But costs had already offset much of the gain in the cereals and dairy sector. “Red diesel is nearing 50p/litre, soya has seen another big spike in recent months and nitrogen fertiliser is well above £200/t,” Mr King said.

Weakening cereal prices and a stronger euro would help livestock producers to a degree, but the industry faced a big job persuading buyers to pay more to cover higher production costs.

“Beef needs the same uplift as cereals and dairy, but I can’t see where it is going to come from,” said partner Francis Mordaunt. Producers faced competition from commodity beef from the Americas and, unlike cereal and dairy, there was no prospect of rocketing demand in India and China.

Sheep producers had to decide whether to tough it out or make big structural changes. “One saving grace is that economies of scale are perhaps easier to implement,” said Mr Mordaunt. “Easy-care systems with one man to 2000 or even 3000 ewes could be made to work with really good management.”

Acceleration

By contrast, the arable sector would clearly make a contribution to the predicted £4bn income figure, said partner John Pelham. Growers on the right soils would at last be able to farm profitably without subsidy.

“Farmers can sell at £120-130/t for harvest 2008/09. But it is not as good as you might think. Typically, the cost of production for wheat was £75-80/t two or three years ago. Now it’s £90-100/t.”

That could be accelerated, albeit temporarily, by a surge in capital spending, pushing the depreciation figure well beyond the typical £70-100/ha mark, he added.

While some capital expenditure might be due, it was too easy to build extra costs into a business that could outlast better prices, Mr Pelham said.