Inflation was the story that dominated much of our lives in 2022 and so far it is shaping up for more of the same this year. However, instead of prices surging across the board, we will be trying to deal with uneven increases and decreases in costs and payments.

For farmers, this changing landscape will have effects on several fronts.

Speaking this week in Dublin, Philip Lane, chief economist of the European Central Bank, singled out agriculture as an industry which has been able, due to supply-demand mismatches, increase profit margins between the end of 2019 and 2022. He said that the extraordinary conditions which allowed those mismatches to occur should improve over time, pushing agricultural profits lower.

Lane makes his argument from the point of view of inflation, saying lower profits for agriculture mean lower prices for consumers. Lower prices mean lower inflation.

The incentive to push agriculture profits lower is driven by the need to get food inflation under control. Latest data shows that food prices were the fastest growing part of the EU “basket” used to measure prices (see Figure 1). Last year, the data was dominated by the surge in energy costs, but preliminary numbers for February show that annual growth in food costs have exceeded the pace for energy.

For the farmer, lower prices mean lower profits

Adding to pressure on farm incomes will be the continued increase in interest rates. Financial markets are expecting the central bank to hike rates to close to 4% over the coming months. While debt levels in agriculture are generally quite low, the higher cost of money will have knock-on effects across the industry. Any farmer looking to borrow for expansion will have to pay more for that credit at a time when profits could start to come under pressure. This should reduce the appetite for investment in the agriculture sector.

As a matter of fact, the ECB is raising interest rates with the express intention of reducing investment in the economy. The logic behind this is that less investment means less demand for goods and services.

Lower demand for goods and services should lead to lower inflation. With price growth about 8% year-on-year according to the latest estimate from Eurostat, the European statistics agency, the ECB is likely to continue to try to disincentivise investment for some time as they try to hit their 2% target.

Groceries

Continuing the theme of rising prices, numbers published this week by Kantar on the Irish grocery market show that inflation for ordinary consumers hit a record 16.4%.

A year ago that number stood at 2.4%, showing the very rapid acceleration in grocery prices across the year. Shoppers have reacted to the price surge by increasingly buying store own-label products, with Kantar revealing the fastest growing sector to be supermarket “value” own-labels (the very cheapest products).

The big supermarkets such as Dunnes and Tesco have managed to hold their market share against the challenge from discounters like Aldi and Lidl while smaller, local stores saw their market share drop below 9%.

One interesting point in the Kantar report was the plunge in sales of cucumbers and tomatoes. The well-publicised shortages of the products during the month clearly had an effect. Much of that fall in availability is a direct result of the energy crisis of 2022 as growers decided not to heat their greenhouses due to excessive costs.

Which brings us nicely on to the next factor to watch:

Energy

The rapid increase in energy prices last year, and their equally rapid fall this year has shaken every part of the economy. For farmers, the violent increase in costs was only manageable due to the rise in agricultural commodity prices. 2023 has seen some reduction in fuel prices, with fertiliser and energy costs inching lower. The reduction in costs has, for dairy farmers in particular, been met with a reduction in income from production.

For policymakers, there is little that can be done in the short or medium term about energy prices as they are a function of global events and global markets.

However, policymakers may feel a lot more tempted to intervene to try to control food inflation as food is generally produced within the European Union. The challenge facing the agriculture sector will be to push back against policies seeking to sacrifice farm profits at the altar of inflation control.