Profit squeeze this year, but good times coming
Profit squeeze this year, but good times coming
By Philip Clarke
BETTER times are around the corner for UK farmers, claim Barclays Bank economists, but only after the industry has endured another profit squeeze in 1998.
The strong £ was the real "villain of the peace", said head of agriculture, John Page, predicting net farm income would fall from £2.3bn in 1997 to just £1.9bn this year. And he was particularly concerned about the plight of lowland livestock and dairy farmers, who were least well placed to deal with another drop in profit.
History showed that, while all sectors of the industry suffered the bad times together, not everyone benefited in the good (see graph).
Cereal growers, in particular, had enjoyed rapid income growth from 1992 to 1995 on the back of sterlings devaluation. But dairy farmers did not share the same benefits and were now up against it as their prices continued to fall. Citing the example of a dairy farm with 245 acres, 120 cows producing 7000 litres, with a £270,000 mortgage and a £100,000 overdraft, the Banks economists had projected income to fall from £47,500 in 1996 to just £2485 this year.
But the bleakest prospects were for those fattening beef in the lowlands, said Mr Page, whose main justification for keeping cattle at the moment was to keep the grass down.
But while farm incomes were expected to show further falls in 1998, the underlying economic fundamentals would begin to change for the better later this year.
Crucially, sterling is forecast to weaken, taking pressure off agricultural commodities. The banks economists predict a rate against the DM of 2.75 by the end of the year compared with 2.96 currently, brought about by the slow-down in the UK economy and the upturn in Germany. And, as interest rates fall in the UK and rise in Germany, that rate should reach 2.60 in 1999.
"The newly-established Euro should also gain strength against sterling in 1999 as uncertainties are replaced by facts," he said. "This will increase the value of support payments to British farmers."
Prospects for grain and meat prices were also better from 1999 onwards as supply and demand came into better balance. And milk prices would benefit from firmer spot prices as sterling weakened.
As such, the bank has estimated UK net farm income will climb 12% in 1999 to £1.9bn, followed by a stronger 24% rise to £2.35bn in 2000.
And, while there would be some increase in the normal 2-3% quitting the industry this year, many businesses were well-placed to survive. Although borrowings were increasing, in real terms they were still half the level they were in the mid-1980s, said Mr Page. There was more equity in farming too, as people who had bought their farms in the 1970s and 1980s had paid off their mortgages.
Arable farmers had invested more wisely in the 1990s, he added. *