November 6, 2014

Outlook for UK Farm Incomes Increasingly Challenging

While the normal variance remains amongst individual farm businesses and between farm sectors, the graph below shows that, overall, income from agriculture provides a relatively small part of total farm business income.

The new CAP being implemented over the next few years creates a great deal of uncertainty for farm incomes. With support payments currently accounting for some 53% of total farm income, some decline in income seems likely.

Sources of Farm Business Income

Sources of Farm Income

Source: Defra

Over the past 10 years income from farming has doubled, and the longer-term outlook remains positive. Growth in world population and wealth, along with both technical and natural constraints on yield improvements, provide a good case for optimism about the longer-term commercial outlook for farming.

The shorter-term outlook, by contrast, looks quite difficult. Market prices, policy changes, and foreign exchange all present significant risks to farm incomes.

The latest figures show farm output prices are down 11% compared with last year, with both crop prices down (-13.6%) and animal products down (- 8.7%). Cereals prices have fallen by over 20% so far this year, and the NFU 2014 Harvest Survey, predicts average wheat yields will be the highest in 30 years – a “record high”. This suggests further output price weakness over the coming months. Input prices have also fallen, but by only 4.2%, leaving farm profitability under increasing pressure.

Changes to the Common Agricultural Policy (CAP), to be implemented from 2015, pose a number of important challenges for farm businesses. Three key challenges are:
• payment capping will greatly reduce the amounts received by larger farms
• new “greening” measures will have significant effects on land use & cropping decisions, with unknown effects on business profitability
• overlap with legacy agrienvironment schemes will impose a number of transitional and ongoing costs for farm businesses.

Compounding these difficulties are the ongoing problems in the eurozone that are undermining the value of the euro. Over the past year, the euro has weakened against Sterling by nearly 10%. Because CAP payments are denominated in euro, the Sterling value of CAP payments is will be lower in 2014 than in 2013, and further euro weakness over the forecast period is more likely than not.


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