Rising input costs will threaten farm businesses this year

Rising input and other costs will be the main challenge for farm businesses in 2017, as the effects of a weaker pound feed through.

Many have benefited from higher output values since the referendum result last June, with the greatest impact being felt in combinable crops.

A weak pound also constrains competing food imports.

The pound gained against the US dollar and the euro after the prime minister’s speech on Tuesday (17 January), but is widely predicted to fall further through 2017.

Consultancy Andersons warned this week that inflation would be one of the key economic factors this year and that farmers needed to be aware of the effect of this on their businesses.

“The current period of better returns may be short-lived. We are obviously heading for the harder end of the Brexit spectrum,” said Andersons head of business research Richard King after the prime minister’s speech.

See also: Traders, farmers and exporters react to PM’s Brexit speech

There have already been significant cost rises, with ammonium nitrate up 11% compared with January 2016. Gas oil prices are 56% higher and HiPro soya meal is costing 24% more than a year ago.

Buying group Anglia Farmers (AF) runs a weighted AgInflation index, monitoring the cost of 140 farm inputs. It has predicted a further 9.5% rise through 2017.

Potential inflation in key inputs includes:

• Fuel (inc electricity) – up 15.2%
• Fertiliser – up 14.6%
• Agrochemicals – up 9%.
• Animal feed and medicines – up 7.6%.

AF group chief executive Clarke Willis said that, while oil prices had risen, high stocks had limited the extent of the rise.

There was more scope to manage price risk by locking into forward purchasing schemes – for example, AF offers fuel prices up to two years forward and fixed forward prices for electricity and feed.

More widely, UK inflation reached 1.6% in December, compared with 1.2% in November. Further rises are widely predicted, with some expecting inflation to reach 3% by the end of March, breaching the Bank of England’s 2% target and bringing the threat of higher interest rates.

Consumer spending will be constrained by inflation and uncertainty, while growth is predicted to slow.

Higher wages?

“As the cost of things rise, there will be a demand for higher wages to compensate. As well as directly affecting labour costs, it will also be felt in general administration costs too,” said Mr King.

With the UK likely to be facing a hard Brexit, this brings labour availability and the ease of trading with Europe into even sharper focus.

Mr King also warned that with the perception of better times in farming, there was a danger that the brakes might be taken off spending.

Slightly better results are expected in 2017 for Andersons’ Loam Farm arable model, with the business surplus from combinable cropping rising to £215/ha for harvest 2017, compared with £97/ha for harvest 2016.

Its Meadow Farm mixed livestock model will see a modest rise in business surplus, from £32/ha in 2016 to £53/ha this year.

Taking the UK outside of the single market would severely affect agricultural trade flows and could see prices fall for many commodities, said Mr King.

Support under a British agricultural policy would be lower than under the CAP, testing those relying on support for profitability.

The current period of better profits must be used to prepare, striving for the lowest cost of production and challenging every element of spending, he said.