Cost of living squeeze and rising input costs threaten farm business margins

Input cost increases and the ongoing impact of inflation will play a key role in farm business planning for the rest of 2022, according to the latest AHDB Agri-Market Outlook.

With food price inflation rising higher and persisting for longer in the UK than in Europe, farm business margins will be further challenged, as they continue to feel the effects of rising energy and input costs. The impact of these events is examined in detail in the latest Agri-Market Outlooks for livestock sectors covered by the Agriculture & Horticulture Development Board – Beef & Lamb, Pork and Dairy.

UK pig meat production is expected to fall by 6% in the second half of 2022, which may impact on export growth volume, while UK demand is also expected to weaken. The impact of price volatility and uncertainties around milk prices and labour shortages are also expected to contribute to GB milk production finishing the 2022/23 season between 1% and 3.8% lower year on year.

Patty Clayton, AHDB Lead Analyst, said: “All livestock sectors will face challenges in the coming months as cashflows are put under pressure in preparation for overwintering. It’s no surprise that we see a contraction in the pig herd given the profitability challenges this sector has faced in recent months. Dairy may be the next livestock sector seeing financial challenges as we head out of summer and higher feed costs bite at a time when demand, and hence milk prices, could start to wane.

“For Beef & Lamb, production looks set to increase following a period of favourable prices. However, these sectors will also face headwinds as demand will suffer on the back of food inflation and the shift in changing consumer preferences as we move towards lower economic growth.”

Sarah Baker, AHDB Economic Strategist, said: “The impact of the Russian invasion of Ukraine is continuing to challenge global growth and is driving inflation across the board. Combined with the impact of leaving the EU and the Covid pandemic, inflation is undoubtedly the biggest issue in the UK, with serious ramifications for our agricultural economy.

“Inevitably, price inflation for essential goods such as food and fuel will force a reduction in consumption for many people, particularly those on low or fixed incomes. Retailers are working hard to keep the costs of food down for consumers, but this has consequences for agricultural producers who are already being affected by the fuel and input cost rises, squeezing business margins.”

AHDB’s Agri-market Outlook is produced every six months and examines the factors likely to affect farm businesses, helping levy payers plan and budget for what may lay ahead. It features detailed market outlooks for each levy-paying sector covered by AHDB’s remit, with Dairy published by 28 July and Beef & Lamb and Pork published by 29 July. The Outlooks for Cereals & Oilseeds are due to follow in early August.

Key findings for the livestock sectors include:

Beef:

• Beef production is expected to be up for 2022, bolstered by higher than anticipated cow throughput
• Overall beef consumption is forecast to drop by a moderate 4% in 2022, as the recovery in foodservice demand slows and retail sales start to suffer as consumers switch to cheaper proteins
• Beef imports are forecast to grow as foodservice demand remains in growth
• Exports of beef are still forecast to increase, helped by higher domestic production and the tight supply situation facing the continent

Lamb:

• The 2022 lamb crop is forecast higher following growth in the breeding stock.
• Total sheep meat production is expected to rebound from last year’s low levels, returning to 2020 levels.
• A return to more normal trading patterns after two years of disruption led to an increase in the number of available lambs to kill, as we shift away from a pre-Brexit kill pattern
• Demand is expected to remain extremely sluggish in the retail and foodservice sector on the back of changing preferences and rising prices

Pork:

• A contraction in the breeding herd is expected, leading to a 6% fall in UK pig meat production, strongly weighted towards the second half of 2022
• UK demand is expected to weaken minimally as the year progresses, as pre-pandemic trends re-emerge along with wider increases in the cost-of-living
• Export markets remain challenging with Chinese demand slowing. Although exports had been increasing, higher GB pig prices and declining production may constrain future volume growth
• Imports are expected to grow in the second half of year as declines in demand are outweighed by declines in production

Dairy:

• GB milk production is forecast to finish the 2022/23 season between 1% and 3.8% lower year on year, depending on the severity of cash flow pressures
• Input price volatility, uncertainties around milk prices and labour shortages will discourage most farms from pursuing yield growth
• Milk prices are high but are only just keeping pace with rising production cost
• China’s oversupply may limit import demand for the remainder of the year, affecting global product pricing
• Low economic growth and food price inflation will weaken demand, potentially limiting further milk price increases

For further information visit www.ahdb.org.uk