Cost of living to hit farm business margins in 2023

High inflation and the impact of the cost of living on consumer demand will continue to impact farm business planning in 2023, according to the latest AHDB Agri Market Outlook.

The damaging effects of inflation, the suppressed economic activity as a result of reduced spending power and the lack of flexibility in the labour market will converge to continue affecting farm business margins.

Farmers are particularly hard hit, facing higher input costs while simultaneously facing a price-sensitive consumer market for their produce.

Sarah Baker, AHDB Economic Strategist, said:

"The main issue with inflation is it drives down the real rate of growth in an economy, erodes households' disposable income and leads to more cautious spending patterns. Coupled with rising input costs for farmers, the industry will face ongoing dual challenges this year.

"As inflation subsides, it doesn't mean that prices are dropping, rather that they have stopped rising as quickly as they were before. Therefore, peoples' living standards will take some time to catch up, depending on income growth. Consumer confidence, along with demand, will take some time to recover, despite inflation dropping as it is expected to during 2023."

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 lie ahead. The analysis features detailed market outlooks for each levy-paying sector covered by AHDB’s remit – beef & lamb, dairy, pork and cereals & oilseeds. The latest outlook also examines trends in farm business inputs and consumer demand.

Key findings

Beef:

• Production is to grow slightly in 2023 due to higher cattle availability, by an estimated 0.6%
• Consumption is forecast to ease by around 2% as cost of living pressures consumer budgets
• Imports are expected to fall by around 2%, driven by easing domestic demand
• Exports could grow slightly by around 3%, reflective of the domestic market balance

 Lamb:

• An increase in production is forecast for 2023, driven by higher carry-over and a broadly stable lamb crop
• Consumption is expected to weaken, linked to recessionary pressures and tighter consumer budgets
• Imports are forecast to ease year-on-year, driven by weaker domestic demand
• Exports are forecast to grow, reflecting the projected domestic market balance and supported by continued demand from the EU

Pork:

• Pig meat production is forecast to decline by up to 15% year-on-year in 2023, driven by a reduction in clean pig kill in the first half of the year, following a significant drop in the breeding herd
• A gradual recovery in the breeding herd is expected, with numbers predicted to increase by 7,000 head between June 2022 and June 2023
• Imports are expected to grow to match the gap left by reduced domestic supplies, meanwhile exports are projected to decline as available domestic supplies tighten.
• Domestic demand continues to ease, driven by the cost-of-living crisis reducing retail sales and eating-out demand

Dairy:

• GB milk production is forecast to record marginal growth in 2023 in the region of 0.3%. However, there is some risk of a contraction in production if margins deteriorate
• Despite some recent signs of lower inflation in agricultural input costs, replacement costs through 2023 will remain high, putting pressure on cash flows
• Global dairy demand is likely to remain challenged by low economic growth, although there is potential for improved import demand from China later in the year
• Domestic demand is also expected to be impacted by a squeeze on consumer incomes, with all products seeing lower sales
• Farmgate prices are expected to decline in the first half of 2023, with some potential for this to abate in the second half if inflation subsides and demand recovers

Cereals:

• Despite an increase in domestic wheat and barley availability this season, strong global prices continue to support domestic grain values. Price volatility is expected to continue, with a finely balanced global supply and demand, and the ongoing war in Ukraine
• Domestic winter crops for harvest 2023 are faring well, though fertiliser cost and application remain a key watchpoint
• Exports are forecast stronger year-on-year for wheat and barley, due to increased domestic grain availability. Oat export forecasts remain strong, though this season’s levels will be led by farmer selling and competitiveness on the global market
• Animal feed demand, and cereal usage, is expected to fall this season due to sector challenges from high input costs to avian flu
• The forecast for brewing, malting, and distilling cereal usage is strong, with increased capacity coming online
• A key domestic demand watchpoint remains bioethanol cereal usage, considering high costs and lower ethanol prices

Oilseeds:

• An increase in domestic production for rapeseed will slightly reduce the demand for imports. However, imports are forecast to remain high due to the UK domestic demand outweighing domestic production
• A sizeable increase in area for harvest 2023 is forecast in reaction to the high prices over the past 18 months. Crops are faring well although there are reports of area loss due to ongoing pest pressure
• Global supply and demand of rapeseed have both increased on the year. Increased availability in the EU is adding to price pressure and improving processor margins. EU crush demand is increasing on the year
• Domestically demand is expected to remain strong
• Ultimately rapeseed prices over the next six months will largely be driven by the direction of the soyabean market, which awaits a high South American crop