Expectations of further input cost increases and more static or declining output values are setting the tone for 2023, with British farmers feeling rather less optimistic about their economic prospects than they did a year ago.
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Rising input costs farmers’ toughest challenge for 2023
© Rawpixel/Adobe Stock

Our annual Sentiment Survey, conducted in October/November and seeking the views of almost 600 farmers, shows that many are actually in reasonable financial shape.

As we reported in our 16 December issue, most farmers said 2022 was a “good” or “very good” year for them – despite the multiple challenges they faced.

About the survey

-The survey was carried out in late October/early November
-It attracted 578 farmer responses
-62% were owner-occupiers, while 22% were tenants
-More than half of respondents grew cereals (54%), 38% had beef and sheep, 14% were dairy farmers, while 9% had pigs and 8% had poultry
-All parts of the UK were represented
-The average farm size this year was 221ha

Arable farmers were particularly upbeat, having enjoyed another year of buoyant prices and decent yields, with many having bought their inputs before the real price spikes caused by the war in Ukraine.

Livestock and dairy farmers faced bigger challenges, with high feed and energy costs, and fodder shortages eating into margins more quickly.

Even so, about one-third still described the year as “good” or “very good”, while half reported it as “so-so”.

But the short-term outlook for all has taken a turn for the worse, with just 38% of respondents describing themselves as “optimistic” about the next six months compared with 42% this time last year.

It is not too difficult to work out why. Asked what their greatest challenge would be for 2023, the most common answer by far was “rising input costs”, with 37% of farmers citing this as their top concern.

This was followed by expectations of worsening market conditions for outputs, a continuation of extreme weather patterns, changing government policy and limited labour availability.

Variations

Of course, feelings of optimism and pessimism about the year ahead varied between sectors, business situations and demographics.

Growers with oilseed rape in the rotation, for example, were among the most optimistic, as were those with renewable energy investments, and farmers growing sugar beet.

Conversely, poultry farmers were much more downbeat – a sentiment shared by potato growers, farmers with increased borrowings, and those in the 55- to 64-year-old age bracket.

The reasons for these differing opinions are not hard to fathom.

According to NFU senior economist Sanjay Dhanda, oilseed rape growers are probably still riding high on the stellar prices they saw at the back end of last season, when values topped £800/t in June.

“Even though many will now be seeing the full effect of higher input costs, the fact is many will have also locked into forward contracts for 2023 ahead of harvest, which secured that market upside,” he said.

The fact sugar beet growers are more optimistic probably relates to the price deal struck between the NFU and British Sugar in June.

It offers a 48% base price increase to £40/t for the 2023-24 contract year – plus various other options to help protect revenues and encourage production.

As for farmers with renewables, Mr Dhanda suggests this could fuel optimism as it will shelter them from the severe price hikes seen in the general marketplace for fuel and energy.

Those who have some surplus green energy to sell back to the grid may also see better returns on it in 2023.

Conversely, potato growers and horticulturalists have been hit hard by the hike in fertiliser costs and the tight labour supply, which will continue to dent returns in 2023, Mr Dhanda explained.

“We are looking at continued shortages of fertiliser throughout Europe, so markets will remain firm.”

Farmers with increased borrowings are also likely to be exposed to further rises in interest rates, as the Bank of England seeks to contain inflation, which is still in double figures.

Price expectations

It was no surprise to find further input cost rises on the cards, though the expectation for 2023 is that they will increase “slightly” rather than “significantly”, as was the case in 2022.

This suggests that some of the sting from this year’s 34% ag-inflation may be starting to ease – something that was certainly witnessed in wholesale gas prices during the autumn, as mild weather enabled suppliers to rebuild their stocks after the shock of Russia’s illegal invasion of Ukraine.

Red diesel values have also come back from the peaks earlier in the year, with current quotes putting it close to the 90p/litre mark, which is “only” about 20p/litre more than last year.

For livestock farmers, the gradual softening of the wheat market over the autumn months may have calmed expectations of continued feed cost rises. The opening of the Black Sea corridor will have been a factor in this.

Among the different farm types, cereal and potato growers were the most wary of “significant” further input cost rises (anticipated by 40% and 51%, respectively), primarily because of their dependence on chemical inputs, which remain bullish.

Beef producers were less concerned, with only 27% anticipating “significant” rises.

As for output values, the majority view was that they would probably “stay the same” in 2023, though there was still more “upside” than “downside”, with arable farmers more bullish than livestock producers about continued price buoyancy.

What else did the survey show?

Borrowings on the up?

Despite having enjoyed a better year financially in 2022, more farmers will be heading into 2023 with increased borrowings.

According to the survey, some 39% of respondents have taken on more debt in the past 12 months – either “slightly” or “considerably” – compared with 19% last year.

Interestingly, it seems that those who consider themselves to be “completely in control” of their businesses have been more willing to borrow, suggesting they have greater confidence to expand, upgrade or diversify.

Potato growers, those with other root crops, and vegetable growers also seem to have taken on more debt, reflecting the particular economic pressures affecting those sectors.

Brian Richardson, head of agriculture at Virgin Money, said the increased borrowing in the survey was slightly at odds with official data, which suggest lending by the Bank of England to agriculture was pretty stable on the year.

He suggested people had been more cautious about investing because of the challenges they faced with the cost of raw materials and the availability of builders.

“Progressive farmers are still making investments in things that can improve their productivity and efficiency, but there is no doubt ag-inflation has put a squeeze on margins,” he said.

Mr Richardson was not surprised to see those in the root crop and horticulture sectors extending borrowing, however, as the acute shortage of labour had triggered a spate of investment in things such as robotics and automated watering systems.

What would you do with £1m?

Our perennial question on how farmers would respond if they had a surprise inheritance or a lottery win once again demonstrated their commitment to their industry, with answers very consistent with previous years.

The most common answer was that they would “invest in the farm”, cited by 31% of farmers – with livestock farmers even more dedicated to the cause at 44%.

Farm managers were the most inclined to “invest in something else” (39%), while owner-occupiers were particularly motivated to “settle my debts” (15%).

Not surprisingly, those in the 55- to 64-year-old age bracket would be most likely to use the money to retire (31%).

It is certainly likely that a £1m jackpot would provide for a more comfortable retirement than the Lump Sum Exit Scheme available from Defra earlier this year, which was capped at a maximum payment of £99,875.

Despite this somewhat meagre offering, some 2,700 BPS claimants applied for the scheme in 2022, but about 500 of these had dropped out by the beginning of November.

What are the biggest changes you plan for your business?

While farmers are clearly committed to the sector, we were keen to find out what changes they are planning in the next three years.

The most common strategy is to find ways of reducing costs – be it reining in debts, using fewer inputs or employing fewer staff. This was cited by 18% of respondents.

Diversifying was another common approach to keeping the business solvent, while some are looking at expansion or investment in new technology. Others just fancy retirement.

This question always triggers a range of additional comments from farmers.

“We plan to reduce our dependence on commodities and increase production of specialities and segmented opportunities,” said a Welsh farmer in the 100-199ha category.

“Use the land more effectively and efficiently by inviting the public to use and pay for green space,” said another farmer in the East Midlands in the 200-499ha category.

Eleven organic dairy farms in Vermont closed in 2021. The next year, 18 more followed. And this year, the Northeast Organic Farming Association of Vermont expects to lose another 28 farms.

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