Agricultural income growth will have to rely on restructuring in the next 10 years, rather than growth in commodity prices. This is a key conclusion from the European Commission Report, Prospects for Agricultural Markets and Income in the EU 2013-2023, issued this week.
At farm level, what does this mean for UK farmers? ‘Firm’ commodity prices are predicted. This is at least a positive outlook compared with the prospect of falling prices, but it doesn’t offer much prospect for income growth on the farm. As ever, farmers will continue to be at the mercy of market and natural forces.
But the report does say that ‘restructuring’ will offer opportunities for income growth. This means yet another long hard look at labour inputs (already well stretched on many farms), continuing attention to detailed management and inputs in order to achieve higher net margins. There is still a big gap between the best and the rest in farm incomes. Although the farmers who make up the top 10% every year tends to be a floating population there is nevertheless a great deal that many farmers can do to close this gap. Fertiliser and fuel inputs also need careful attention given their relationship to the price of crude oil.
If ‘restructuring’ points to the need for new kit, the next year or so may be the best time to buy with capital allowances for Income Tax set at very generous levels until January 2015.
The agricultural economic outlook also means that farmers must continue to look at other options for their assets. Will the next 10 years see the real emergence of opportunities to profit from natural capital, by getting involved in carbon storage, water management, biodiversity offsetting or any of the other opportunities which are starting to open up in this area?
Key factors identified in the EC report include:
- Commodity prices stay firm given low productivity growth, growing markets for biofuels and overall global food demand;
- In the arable sector, biofuels will be the subject of the most dynamic demand factors. By 2020 biofuel is expected to make up 8.5% of liquid transport fuel, with yield growth expected of 0.6% on average;
- The maize and wheat area is therefore expected to grow;
- Isoglucose is expected increasingly to take the place of sugar in processed foods – although no mention is made of the obesity crisis also in the news this week;
- 2013 saw the lowest meat consumption for eleven years in the EU, at 64.7 kg/head. It’s expected to be up to 66.1kg by 2023;
- Beef production is expected to drop, while pigment production is expected to rise from 2014 onwards (but from low levels given the impact of recent welfare reforms);
- Dairy expansion is expected to be restrained by environmental factors, with prices expected to stay firm but not spectacular;
- The agricultural workforce is expected to shrink, and to see a widening income gap.
Key risk factors identified in the report include:
- The success or otherwise of the African Green Revolution;
- Higher prices for compound feeds;
- Crude oil prices;
- Euro/dollar exchange rate;
- The possibility of a sudden drop in growth coupled with currency depreciation for a major exporting country like Brazil
This highlights a few key indicators that farm businesses should watch carefully.
I was asked yesterday whether farmers should take reports like this seriously. Not to the extent of reading all 130 plus pages, but the headlines do point to some key issues which are worth following in the next 10 years.
For other coverage of the report, see:
http://www.fwi.co.uk/articles/17/01/2014/142865/eu-forecasts-10-years-of-firm-prices-for-farmers.htm [Farmers Weekly, accessed 18 January 2014]
http://www.euractiv.com/cap/farm-produce-prices-remain-stabl-news-532759 %5BEuropean News website, accessed 17 January 2014]
http://www.globalmeatnews.com/Industry-Markets/EU-economist-predicts-fall-in-meat-consumption [Global meat news, accessed 17 January 2014]