George Chichester

Senior Director, Farm & Estate Management

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George

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It’s not been a great year for agriculture with overall profits from farming for the UK falling by over 2% between 2013 and 2014, and a much bigger fall expected for 2015 once all the data is in.

At the same time, the value of underlying subsidy support to farmers has fallen by 25% in the past 6 years. This has suffered due to the changing economic climate in Europe and is hitting farmers’ bottom lines.

Even over the last year, the effect of the CAP Budget cut in connection with the new Basic Payment Scheme introduced last year, its redistribution across regions, and a further fall in exchange rates has meant that for England’s lowland farmers, the 2015 payment was, in effect,  10% less than the year before. 

Arable hit by global changes

On the face of it, it might have seemed like a good year for arable farmers. 2015 was a record year for average wheat yields, according to Defra, and fuel and fertiliser prices fell.

But these positives have been insufficient to make up for the big falls seen in commodity prices over the past 2 years as shown in the huge drop in wheat price. Prices halved from £200 per tonne to £100 in just 3 years.

While world supply and demand are pretty much in balance, there have been 2 years of good output which has dampened markets a little. But how does a 4% excess in supply lead to a 50% drop in price?

World economics plays a big part. China is running short on cash so is drawing down from its vast reserves of grain and soya to keep food cheap, reducing its reliance on imports. In the Middle East, falling oil prices mean many countries are struggling for cash to pay grain producers. Plus, instability in countries like Egypt has scared a few suppliers into adding larger margins in case they don’t get paid.

India has imposed a 25% tax on wheat imports to support its internal prices, and Russia is desperate for dollars and therefore exporting everything it can at low prices.

Then there’s the supply issue. World stocks have been gradually rising, but farmers are struggling to find places to store it. Grain production is an annual cycle and farmers need to empty their barns within the year to make space for the next harvest. This means many farmers are now selling at a loss to empty their barns.

But, there is hope for the future. The market should gradually overcome these problems as world consumption rises. This will, hopefully, see the markets rally.

Dairy and livestock margins still being squeezed

Despite a short term return to sensible margins for dairy farmers (34p per litre), there has recently been a return to lower prices (24p).

Even though the cost of livestock feed and fuel is down, a one third reduction in gross income has more than offset these savings.

Global output of dairy products continues to rise – by about 2% per annum – but the weakening Chinese economy and ban on imports of dairy products into Russia are hitting European dairy producers.

The same applies for the pig sector too – which has suffered pretty much in line with dairy as a result of world factors (especially Chinese) and political factors (such as the ban on exports to Russia).

For grazing livestock, slightly reduced prices have been covered by slightly reduced costs, delivering a small increase in profit. But as usual, the end result remains pretty unexciting.

Weather still a big factor

Onefactor farmers increasingly have to adjust to is climate change.

For those who doubt its impact…

• 2012 was the wettest year for 100 years
• 2014 saw flooding in the Somerset levels and the wettest January on record
• 2015 saw the wettest month (December) ever recorded
• December 2015 was the warmest December on record
• 2015 was the warmest year on record, globally

The prediction is that 2016 will be warmer – and wetter - still. Farmers need to consider whether their cropping and stocking policies need adjusting in response.