Agricultural Bulletin - Summer 2012

FARM INCOMES BOOM

2011 was a very successful year for farm businesses, with profits hitting their highest levels for 15 years. This impressive performance is shown in the latest total income from farming figures released by Defra in May.

Total income from farming

The total income from farming (TIFF) figures show the returns to entrepreneurs (farmers) in UK farming – they are a close reflection of the aggregated profit for the agricultural industry. For 2011, profit is (provisionally) put at £5.69bn. This is a 25% improvement in real terms over the 2010 figure. This profit is also the industry's best performance since 1996, and is £0.5bn higher than the next best year in that 15-year period (which was 2009).

Output rose by 15% between 2010 and 2011 (at current prices), with crops increasing by 21% and livestock by 15%. This increase outpaced the rise in costs with 'intermediate consumption' (basically variable costs) going up by 10%. Other costs rose 14%, with subsidies remaining unchanged.

It is important to highlight that these figures are still only provisional and revised ones will be published in November. There is a history of quite large revisions and this year is expected to be no different. Our view is that, if the figures are going to change, they will come down. Defra's release states that it has collected only 30% of the data on variable costs and 55% of the data on other costs. Given that Defra is therefore likely to find more costs, we could end up with a TIFF closer to £5.25bn.

Returns per entrepreneur

The returns per entrepreneur (per farmer) are even more impressive. As the industry gradually restructures, farm sizes are increasing and the number of farmers is slowly declining. The result is that the returns are being shared by fewer people. This sort of change is normal and is even necessary for the survival of any healthy industry. The TIFF per entrepreneur is almost at the same highpoint as that reached in the mid-1990s.

Looking ahead

Looking to 2012 we would expect incomes to fall back a bit more – possibly to an overall profit for the sector of around £5bn. On the output side, crop prices may be slightly down on 2011 as the market has weakened a little. Milk prices are heading down (however, we are already part way through the year, and prices are higher than the equivalent period in 2011). Beef and lamb prices remain strong, and pig values should pick up towards the end of the year. Poultry is a sector that often gets overlooked, but it contributes a big element to TIFF. Output values seem reasonable there too – especially with egg prices going up.

The reason for our forecast decline in TIFF in 2012 is costs, which climb relentlessly upwards. The single biggest cost item in the UK agricultural accounts is animal feed. Fuel price rises are welldocumented and other costs, such as machinery, will also rise compared to 2011. Taking these factors into account we arrive at our decline in profitability to somewhere in the region of £5bn (possibly a bit below). Before getting too despondent by this outlook, it is worth remembering this would still be considerably better than some of the returns seen between the mid-1990s and early 2000s (double in some cases). However, any predictions on incomes come with a big health warning regarding currency. Any significant realignment of the pound versus the euro could occur quickly, making great...