September 3, 2010

 

Spiraling costs weigh on UK farm profits

Rising input costs have put increasing pressure on UK farm profits over the past year and the situation is likely to get even tighter.

 

Latest results from the Anglia Farmers Agricultural Inflation Index show that average farm input costs rose by 5.27% between September 2009 and August 2010, with all sectors affected. Beef and lamb costs increased the most, up 9.3%, while dairy costs were up 6.5% and cereals and oilseeds up 4.5%.

 

The figures were well above food price inflation at nearer 3%, said Anglia Farmers director Jim Alston. "This reflects the rise in cost to the consumer. However, the cost increases experienced by the producer of those foods is rising at a faster rate, which is currently being absorbed by the food production industry."

 

Higher fertiliser, fuel and animal feed costs drove the "agflation" figure, which experts fear could increase further over the 2010/11 season.

 

In the arable sector, next season's variable costs could be 15%-20% higher than for the 2010 crop, said Andrew Wraith of Savills' agribusiness. "Fertiliser costs are up about 20%-25% on last year's crop, seeds are probably 15% more on the back of higher grain prices and I expect agrochemicals will be 3%-5% more expensive."

 

Higher grain prices would help offset the increased costs, but for the 2010 harvest many had sold forward at prices lower than the recent headline values, he said.

 

"Next year's crop will cost more to grow, so it's worth considering forward markets again to try and offset some of these higher costs. The key is to look at what you're spending and where you need to be in order to make a margin."

 

The livestock sector faced an even bigger challenge from spiralling costs, according to Andersons' partner and head of business research Richard King. "While the arable sector is at least benefiting from better cereal prices, this is having the reverse impact on livestock feed costs. What's more, a lot of forage has been of low quantity, so many farmers will need more concentrates, as well as having to pay more for them."

 

King suggested the worst-hit dairy farms that had been forced to buy more feed and bedding could see their cost of production rise next year, while others could see little or no increase in costs.

 

Even if cereal prices fell over coming weeks there could be a delay in how quickly this is reflected in feed costs, he added. "Feed companies appear to be operating on fairly short books. They didn't buy much forward before prices took off earlier this summer, so many have had to buy a lot for current and future use at expensive spot prices."

 

Farmers were advised to ensure they knew their cost of production and take measures to offset any increase, such as buying or selling forward, maximising the use of manures and slurries, or soil sampling to more accurately target fertiliser use.