Margins across a range of farm types are likely to come under pressure in 2023 as the full effects of recent input cost rises hit home, attendees at last weeks’ autumn conference organised by the Irish Farmers Journal and the Livestock and Meat Commission were told.

“Significant headwinds are beginning to emerge,” suggested Michael Haverty, a partner at leading UK farm consultancy business, The Andersons Centre.

Presenting his analysis, Haverty said he expects to see a general weakening of output prices through 2023 as markets adjust to the conflict in Ukraine and a wider global economic slowdown. But there is no sign of any ease off in the cost of inputs, and while farmers might have been able to mitigate against some of those cost rises this year (for example by utilising fertiliser bought in 2021), that option does not exist going forward.

Issues around costs are also not helped by a weak sterling which is adding to already record energy and animal feed prices.

Historically, when sterling has been weak, UK farming does well, because a weak currency makes UK imports more expensive, and UK exports more competitive on global markets.

Previously, it also brought a boost to farm payments, set in euros and converted to sterling.

But the current outlook is different, with input cost and inflationary pressures weighing heavily on prospects for 2023.

Farm payments are also now set in sterling, and are not index linked, so with inflation at 10%, those payments are now worth much less than before.

“We do see a significant drop in UK farm profitability in the year ahead,” said Haverty, although he also pointed out that some sectors are likely to fare better than others.

Dairy profits will be squeezed in 2023

Milk prices have kept pace with costs, meaning that dairy farmers generally have had a profitable year.

Normally high prices stimulate a rapid lift in milk supply, but high costs are currently preventing that from happening, so there are no signs of a significant market downturn at present.

However, Haverty does expect high prices will lead to weaker consumer demand, and with a recovery in global milk output expected in 2023 after droughts hit supply in 2022, Andersons predicts prices will drop into the low to mid 40s next year, and potentially below 40p in 2024. With costs likely to remain high, it means margins get squeezed.

In its 150-cow Friesian Farm NI model, Andersons shows a business surplus after all costs and personal drawings are removed of 3.2p/l in 2022/23, falling to just 0.3p/l in 2023/24.

“NI dairy farmers are competitive on a global level. Where costs are managed well, the opportunity is still there over the long term to make decent returns,” said Haverty.

Challenging outlook for beef

Farmers producing beef over the coming months need significantly higher prices to cover record costs, but Michael Haverty is not optimistic that those high prices will materialise.

“Given the inflation the UK is facing, consumers are going to pay more attention to meat prices. This may impact beef demand over the winter,” he suggested.

While demand might soften, a counter to that is weak sterling, which will make beef imports more expensive, and that should help to support domestic prices. It will also benefit UK lamb sold into Europe.

Losses

However, even if prices do edge up, the reality is that this will be loss-making for many beef and sheep farms. The 60ha Andersons Meadow Farm model, based on 27 sucklers and 200 ewes, showed a profit of £25/ha in 2021/22 after all costs and drawings of £20,000 are removed. In 2022/23 this is predicted to be a loss of £232/ha, followed by a loss of £325/ha in 2023/24.

“Our farm is probably towards the lower end of physical performance. But either way, the coming years look very challenging,” said Haverty.

Despite those profit warnings, there is probably little indication of a rapid exit from the sector, partly because many beef and sheep businesses are run by what Haverty describes as “lifestyle farmers”. He also points out that most farmers are sitting on valuable assets and with land prices going up, there is the option to borrow money or sell a small portion of land to generate cash.

Supply and demand boosts grain margins

While the Andersons analysis points to a general weakening of output prices through 2023, an outlier in that might be grain, with tight supply and strong demand continuing to underpin prices.

The Andersons Loam Farm model is based on a 600ha farm growing a range of crops, with margins calculated using real-life data.

Surplus

In 2021, the farm recorded a business surplus of £573/ha after all costs and drawings were removed.

This increased to an exceptional £1,006/ha in 2022.

“We didn’t think 2021 could be beaten. It has been a very profitable year, but there are challenges ahead,” suggested Haverty, pointing to input cost inflation which is now starting to really bite.

“In 2023, the farm’s business surplus is expected to fall to £467/ha.

“A business surplus of £467/ha is still quite good. On arable farms, it all depends on input costs being managed effectively,” said Haverty.

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