2018-12-28 

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Farm Profitability Prospects for 2019

Richard King of Andersons Farm Business Consultants says forecasting profitability for 2019 is rendered almost impossible by the uncertainty over Brexit.

The 2018 farming year has been dominated by the weather – the cold, wet spring was followed by a rapid swing to the hot dry summer, yet the consequences for profitability are not clear cut.

Total Income From Farming

At first sight, lower yields of crops and forage, and reduced livestock output due to either cold or heat would suggest a reduction. However, in some cases, lower yields have been offset by better prices. Input costs may also have been reduced, at least in the arable sector. Historical evidence suggests that a dry summer is usually better for farm returns than a wet one (remember 1984, 1995, 2003 and 2011).

Overall, when final farm accounts for the year are prepared, the results may well show that returns are better than things perhaps felt at the time. What is clear, is that there will be a large disparity between different farms depending on factors such as location, enterprise mix, local rainfall and timing of produce sales. Given that it is dangerous to make generalisations about returns in 2018, we are going to do just that by looking at overall industry profitability for the year.

The ‘headline’ measure for the economic performance of farming is Defra’s Total Income from Farming (TIFF) figure. It shows the total profit from all UK agricultural and horticultural businesses on a calendar year basis. It measures the return to all entrepreneurs for their management, labour and capital invested. In very simplistic terms it is

The latest published data is for the 2017 calendar year. This shows total profits for the industry were £5.74 bn. This was the highest return (in real terms) for 20 years. Indeed, when the figures were published in the spring we were surprised at how good they were - profit for the year was 40% higher than in 2016. Whilst the data is only provisional, and there is a history of revisions to the data, the figures are still likely to point to a very profitable year, even if there are some adjustments.

The first official Defra estimate for the current 2018 year will not be published until February 2019. However, Andersons run a model that mirrors the Defra TIFF calculation. This suggests that there will be a decline in profitability compared to 2017 of around 15%. Partly this is a result of the weather factors outlined above, but general cost increases and market downturns in some sectors also play a part. The result is a TIFF of £4.85bn for the year.

Forecasting profitability for 2019 is rendered almost impossible by the uncertainty (at the time of writing) over Brexit. For the purposes of modelling, it has been assumed that a deal is done that prevents a ‘cliffedge’ Brexit in March 2019. On this basis, the prospects for 2019 look reasonably good. Much, as ever, will depend on movements in currency. Ironically, if a Brexit deal is achieved this may be bad for UK farming in the short-term, as it would likely see a strengthening of the Pound. In our forecasts for 2019 it has been assumed that Sterling will be in the range €1 = 85-90p. With no repeat of the weather-related issues of 2018, a small recovery in TIFF is forecast – up by around 5%. This is despite some weakening of output prices on global markets and a general upwards movement in costs. At this level TIFF would be very close to its real-term average for the last decade.

Of course, aggregates and averages hide a great deal, and tell us nothing about the performance of different sectors or regions, let alone individual farms. The articles that follow in Outlook provide a more detailed discussion of many of these points.

Andersons

Related Links
link Brexit: A Time Window for Change, says CAAV
link The Public View of Future Farming Subsidies
link Farmers Guardian State of British Agriculture Survey 2018
link Charity Set to Give Out 650+ Hampers to Farming People