Inflation to hit farm business margins in 2022

Rising costs will be crucial to farm business planning over the next six months as high rates of inflation impact the UK agricultural economy, according to the latest AHDB Agri-Market Outlook.

The aftershocks of EU exit, the economic ramifications of Covid and the ongoing energy crisis, with its knock-on effects on input prices, are all likely to put pressure on bottom lines over the next six months. The impact of these seismic events on the UK economy as a whole is examined in detail in this latest edition of the Outlook, with a particular focus on what the changes could mean for our agricultural industry.

Sarah Baker, AHDB Economic Strategist, said: “The pandemic has been unusual in economic shock terms both in its speed of onset and its magnitude, as well as it’s uneven impact across the economy as a whole. The agricultural industry has been particularly hard hit in a number of areas, such as the reduction of the food service market or staff absences exacerbating labour shortages in abattoirs and across food processing caused by Brexit.

“Both Covid and EU Exit have led to the so-called scarring of the economy – those permanent changes that will slow down its ability to return to ‘normal’. These factors can be seen clearly in agriculture, both in supply chain management and in consumer behaviour.

“Overall, it will be a year of recalibration as individuals and businesses adapt to a new operating environment.”

AHDB’s Agri-Market Outlook, produced every six months, is intended to highlight the various elements that will shape farming’s fortunes to help levy payers plan, prepare and budget for the challenges and opportunities ahead.

It features detailed market outlooks for each levy-paying sector – beef & lamb, cereals & oilseeds, dairy and pork – alongside sector-by-sector insight into retail and consumer demand for agricultural products.

Key findings include:

Beef:

– Beef production forecast +1% in 2022, as more prime cattle become available

– Overall beef consumption forecast down -1%, as easing retail demand offsets rising foodservice activity

– Beef imports forecast to grow slightly (+1%), as foodservice demand increases

– Exports of beef forecast to increase by over 10%, helped by higher domestic production and increased import demand on the continent

Lamb

– Increase in number of available lambs to kill in as we shift away from a pre-Brexit kill pattern

– Lamb imports forecast to remain low as New Zealand continues to pivot towards China and shipping costs remain high

– Total global lamb supplies forecast to remain tight as NZ and Australia continue to rebuild flocks

– Demand expected to fall 3% as restrictions ease and Easter demand improves, but environmental concerns play a role and lamb has lost some ”menu share”

– Imports fall 6% while exports could grow by 5%.

Pork:

– A contraction in the breeding herd is expected, leading to a 2% fall in UK pig meat production, weighted towards the second half of 2022

– Export markets remain challenging, with Chinese demand slowing and a weak EU market. However, trade may increase again year-on-year as new trading conditions with the EU become the norm for UK exporters

– UK demand is expected to weaken slightly, although falling production, recovering foodservice demand and increased exports could all support import levels, particularly in the second half of 2022

– Headline figures for 2022: Production down 2%, exports up 9%, imports up 1%, demand down 2%

Dairy:

– GB milk production is forecast to end the 2021/22 season down on the year, with only modest growth in calendar year 2022, as high input costs impact yields

– Tight global milk supplies are expected to keep international markets supported

– UK imports will likely be up compared to 2021 as foodservice demand returns

– Overall, wholesale and farmgate prices are likely to remain supported through the first part of 2022

Cereals:

– Both globally and domestically, the wheat balance sheet remains tight, supporting prices. This tightness looks set to continue until the Northern Hemisphere crop comes online.

– UK wheat area forecast up but barley area back on the year. A reduction in spring cropping in favour of winter drilling is driving this. Currently, winter crops are looking in good condition going through the winter. However, current high input costs (e.g. fertiliser/fuel) could affect application programmes in the spring, with question marks over yield implications.

– Animal feed demand has been supported by livestock backlogs on farm. Forecast reductions in herd size could start to decrease demand

– A rebound in brewers, maltsters and distillers barley demand is expected, as the country continues to emerge from lockdown restrictions

Oilseeds:

– Rapeseed supply looks tight for the rest of the season. Paris rapeseed prices (nearby) are at record levels, reflecting the tightness in the market. The large Australian crop coming online might provide a ceiling to rises but is unlikely to remove much support.

– For harvest 22, a slight rebound in the UK OSR planted area is recorded but still the second lowest this century. Concerns around Cabbage Stem Flea Beetle are still impacting greater area expansions

– The increase in fertiliser costs could impact usage and potentially yields this growing year, if spray programmes are reduced or delayed

AHDB Economics and Analysis Director David Eudall said: “We are currently seeing a period of inflation that is coming off the back of a shift in trade relationships with our largest trading partner, a supply chain that is struggling with the impact of a global pandemic and we entering a period of direct subsidy reductions.

“So, whilst inflation may be transitory, we’re facing it at possibly the worst time. What it all means is a period of higher costs for farming businesses and while commodity prices are sitting at high levels, we know that the markets are cyclical and this can change quickly.

“As ever, our message is to understand your business, the market pressures faced and plan for the future. Not only does our bi-annual Agri-Market Outlook offer the chance to take stock and look ahead, we are also providing free half-day consultancy advice as part of Defra’s Resilience Fund.”

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