Extraordinary events continue to make a big impact.
DEFRA produces an annual calculation of Total Income from Farming (TIFF). This shows the net profit for all UK farming businesses, excluding notional wages for proprietors or notional rent on owner occupied land but including “capital consumed” – i.e. depreciation, so is very similar to the profit shown in a set of farm accounts. There are normally two or three revisions to the figure throughout the year and, whilst these are normally quite small, the difference between the provisional and final figures in 2021 has now been moved up by some 13.5% at £6.8bn – so clearly we live in volatile times.
TIFF 2022 has now risen to the highest level this century at £7.9bn, up by £1.1bn from 2021, and £2.3bn above the five-year average. Clearly, this exceptional figure reflects exceptional circumstances, including as it does the full impact of the war in Ukraine and the shock to world food markets which followed. It does not include the full impact of the inflationary surge which followed, nor the rises in interest rates in recent months.
Digging deeper into the detail, we can see that in broad terms both arable and livestock sectors benefitted equally, with arable production benefitting from good yields and rising prices. For example, there was 10% more wheat and it sold for 35% more per tonne. As usual, this price increase fed through into feed costs for livestock farms where feed costs were £1bn higher. Nonetheless, the livestock sector also benefitted from price rises, with gross income rising by £2.7bn. Within the livestock sector there were significant variances, with the bulk of the increased income being in the milking herd (£1.8bn) and beef production (£0.4bn). Lamb and pig meat will have shown a modest increase but the poultry sector was hit hard by avian flu and feed prices, with income from egg production falling by nearly 22%.
Looking at the balance sheet for the industry, there was a drop of about £4bn in fixed assets, long term liabilities were virtually unchanged, and net current assets increased by about £1.7bn, so, although the net value of the industry reduced by about £1.5bn, the immediate liquidity position improved slightly. The overall asset base of £322bn is now nearly 20% higher than it was in 2019. However, putting that in context, the return on capital is a derisory 2.2% – for the best year this century, and disregarding proprietors’ notional wages or rent.
Finally, there are a few other points of interest in the cost analysis. Depreciation rose by some 9%, with investment clearly being made in both buildings and equipment, wages only rose by 1.7%, rent fell marginally, and interest payments increased by about 3.5%.
So whilst it was a fairly good year for at least some parts of the industry, there could be significant problems on the horizon. Basic payments will continue to fall and, even at the current reduced level, they still represent well over 40% of net income. Over the last twelve months, the price of cereals has fallen to almost half of the 2022 peak and, although some may have sold forward, many farms will see significantly lower turnover this year. Some input costs have fallen, but not as swiftly and to the same extent as the grain prices, and others will have risen in line with more general inflationary pressures. Bank interest, in particular, will be problematic for some, and all will suffer from higher energy pricing. Perhaps most dangerously, as we move towards an election, and with pressure on government finances generally, outside commentators will judge the current heath of farming finances on the basis of these historic figures rather than the much more problematic current data.*The views expressed are the author’s and not ICAEW’s.