Date
13 Apr 2023Category
Restructuring & InsolvencyRampant inflation of up to 30% in agricultural input costs is reversing decades of falling prices and driving the UK’s farming crisis, with Britain’s farming industry is likely to shrink to its lowest income level in modern times.
Various forecasters anticipate a steep drop in farm income, from £6 billion in 2021 to £3.5bn in 2024*, which raises serious questions about whether policymakers are doing enough to ensure UK food security.
British farming and horticulture are now being hollowed out by agri-inflation and, as a result, we may well see a future surge in imports to meet domestic shortfalls as broken farmers give up.
This trend, caused by a convergence of black-swan factors and subsequent record-high inflation, along with the phased withdrawal of farming subsidies following Brexit, is likely to exacerbate the long-term trend since 1988, where the amount of UK-originated food consumed in the UK has fallen from 66% in 1988 to 58%.There is a real danger that the UK will be at the mercy of overseas suppliers to feed our 69 million population.
Matters are compounded because agri-inflation is buffeting against the barriers of the top 10 supermarkets which control 90% of groceries supplied to UK consumers.
Graph data from the Office for National Statistics shows a 15.5% RPI increase in food and catering prices over the last 12 months to January 2023 – there hasn’t been a near-vertical trajectory experienced like that in over four decades. This saw food inflation reaching a record high of 16.8% back in December.
These sky-high figures mean farmers’ profit margins are being continually eroded, with cash reserves whittled down, energy prices through the roof and the cost of borrowing more expensive because of the recent interest rate increase to the current 4.25%.
Accepting seasonality will cause the production of commodity food stuffs to peak and trough each year, the overall trend is falling domestic food production levels from UK farms. This begs the question about whether the policymakers have actually got a handle on UK food security during these tumultuous times – they need to swap their pens for ploughs to understand just how serious all of this is. They have prevaricated over the recommendations made in their own National Food Strategy reports of 2020/21, and simply assume private sector will ensure business continuity whilst it continues to review threats and risks.
It is also worth considering, as the UK looks to net-zero by 2050, that increased imports will cause more carbon emissions in the supply chain than if the food was homegrown. There’s also the matter of food and animal welfare standards in countries where quality and welfare standards may not be as rigorous.
This anticipated steep drop in UK farming income, from £6bn in 2021 to just under £5bn last year, with £3.25bn forecast for this year and £3.5bn in 2024, is especially concerning because about £3bn of that income is farming subsidies. These subsidy payments are disappearing at the time when they are needed most to offset rising input costs and are no different to families receiving state support because of income shortfalls.
Farming income appears to be going backwards – the £3.35bn income forecast for this year would be around the same figure as it was in 2007, some 16 years ago.
Based on government figures, the UK agriculture industry, covering 71% of UK land, had 216,000 farm holdings in 2021 and employed just over 467,000 people. In 1960 there were nearly double the amount of farm holdings.
Average profit for all farms in 2021 was £50,900 but that figure is masked by farm subsidies, known as Direct Payments, which made up just over half of profit. The average net income from Direct Payments was about £27,400, which means that tens of thousands of farms will struggle once the subsidies have been withdrawn and agri-inflation continues to pile up the cost of farming inputs such as machinery, automation, fertilisers, feeds, building materials and, if you can get it, labour.
The UK farming industry has been put into a tailspin – the UK has always been a large net importer of food and the danger is that this trend is accelerating due to agri-inflation. You can’t suddenly switch on home-grown food production if the taps are turned off abroad because of adverse weather or geo-political reasons.
Perhaps most worrying of all is the lag effect. The Direct Payments are dropping off following Brexit and the scheme to encourage older farmers to retire has already ended.
We are already seeing an impact on eggs - this scaling back by the egg industry, which is also affected by the avian flu outbreak, is potentially in order of nearly one-third. Which means we face the prospect of eating many more eggs shipped in from abroad.
Basically, because of the lead time of production of crops and livestock, there is a huge lag effect before agri-inflation consequences fully come home to roost. Farmer after farmer will throw in the towel – the maths won’t stack up – and we are already seeing the warning signs.
Farmers facing financial hardship are urged to seek professional advice at the earliest opportunity, putting their pride in their pocket. That way, more options are available, rather than leaving it to that desperate point of no return.
Food security versus self-sufficiency has been debated since the Second World War but decades of food price deflation made it less of an issue – now, with pernicious agri-inflation, the topic merits more than just a cursory glance by Westminster.
If the rot is not stopped, who’s to say the British people can’t be held to ransom over food supplies from overseas, either inadvertently through bad weather/climate breakdown or deliberately by hostile state actors or through sudden trade embargoes?
The UK is increasing its energy security through renewables and nuclear, to avoid overseas dependency, but there’s not point being warm if there is no food on the dinner plate.
In January, I addressed the dire consequences of agri-inflation to the business support agriculture team at one of the UK’s leading banks. In it, I spoke of an evolving divide in farming models – ones of ‘scale’, involving corporate vertical integration and mechanisation, and ‘lifestyle’, featuring increased property and leisure diversification to supplement reduced farm income. We provide advice on both models from accountancy and taxation perspectives, given each has distinct requirements and challenges.
If you have any questions in relation to the challenges facing agri businesses and how to navigate them, please get in touch with a member of our specialist team or your usual Azets advisor.
*Andersons, Total Income From Farming (TIFF) forecast, December 2022
