A potential black cloud on the farming horizon is further problems with the euro

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With one or two exceptions, commodity values are as high as they have ever been but a leading firm of agricultural consultants predicts that there has been a massive fall in farm incomes in the past year – and that there will be serious cash-flow problems for some farm businesses in the coming months.

Using the UK government’s method of calculating the profitability of the farming industry, Andersons predicts in its Outlook 2013 forecast that the total income from farming for 2012 will show a drop of more than 
£1 billion from the previous year – falling from £5.3 billion in 2011 to around £4.25bn.

Joe Scarratt, a consultant with the company based in Melton Mowbray, said that most of this reduction in income in the livestock sector was down to increased costs, especially feed – with this being the single biggest item of expenditure for many farmers.

For those buying in animal feed, cereal and protein costs rocketed in 2012, although he points out that there is an increasing gap between those who are running their businesses tightly and those who are not coping as well – with the former still turning out good profits.

For arable farmers, input costs have also risen. But the big factor for many of them has been the reduced tonnage and poorer quality from both cereals and potatoes in the 2012 crop.

Again in this sector, Scarratt notes the huge variability between farm businesses depending on how they coped with the bad weather.

The big problem from this estimated reduction in farm income, he predicts, will come in the next few months with a number of businesses facing severe cash-flow problems.

This will be brought about by a combination of higher costs, lower output volumes, smaller single farm payments – because of currency swings – and, to top it all, tax demands.

However, for those who can overcome these hurdles, Scarratt believes that the prospects for 2013 look reasonably good – provided, that is, the weather reverts to more normal and amenable patterns.

Grain prices would be expected to ease back slightly with increased world production and this will help reduce future feed bills. Pig and poultry prospects look reasonably strong, as do beef and sheep markets.

However, the potential black cloud on the financial horizon is further problems with the euro valuation as this determines the single farm payment.

“The sterling versus euro conversion rate is of fundamental importance to the profitability of the farming industry,” he states. “The eurozone crisis rumbles on and a significant weakening of the euro to the detriment of UK farming cannot be ruled out.”

From a Scottish perspective, Scarratt’s colleague, Ben Kellagher, who is based in Edinburgh, confirmed that cash-flows could be tight going into 2013 and that there will be some “very difficult” meetings to be had with bank managers.

In addition to all the other unknowns facing UK farmers, Kellagher highlights potential problems linked to the independence referendum in 2014. The unknowns here include whether or not a newly-independent Scotland would have to apply for membership of the European Union and whether or not it would have to adopt the euro as its currency.

He admits this issue is far from settled with the First Minister Alex Salmond claiming the above scenario might not be the case, but Kellagher remains cautious, saying: “This matter could pose huge risks for Scottish agriculture and the Scottish economy.”

Kellagher points out that Scottish farmers are already facing greater turmoil over their support payments system than their English counterparts in that they will have to move to an area-based support system, which is already in place down south.

He advises Scottish farmers with above average levels of support to look at the implications to their bottom line and what can be done to retain current levels of profitability and thus ensure the future sustainability of their businesses.