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Inflation to hit UK farm business margins in 2022

27 January 2022

Business recalibration is recommended

Rising costs will be crucial to farm business planning over the next six months as high rates of inflation impact the UK agricultural economy, according to the latest AHDB Agri-Market Outlook. AHDB is a UK statutory levy board, funded by farmers.

The aftershocks of EU exit, the economic ramifications of Covid and the ongoing energy crisis, with its knock-on effects on input prices, are all likely to put pressure on bottom lines over the next six months. The impact of these seismic events on the UK economy as a whole is examined in detail in this latest edition of the Outlook, with a particular focus on what the changes could mean for our agricultural industry.

“The pandemic has been unusual in economic shock terms both in its speed of onset and its magnitude, as well as its uneven impact across the economy as a whole," said Sarah Baker, AHDB Economic Strategist. "The agricultural industry has been particularly hard hit in a number of areas, such as the reduction of the food service market or staff absences exacerbating labour shortages in abattoirs and across food processing caused by Brexit."

“Both Covid and EU Exit have led to the so-called scarring of the economy – those permanent changes that will slow down its ability to return to ‘normal’," she added. "These factors can be seen clearly in agriculture, both in supply chain management and in consumer behaviour."

“Overall, it will be a year of recalibration as individuals and businesses adapt to a new operating environment," said Baker.

AHDB’s Agri-Market Outlook, produced every six months, is intended to highlight the various elements that will shape farming’s fortunes to help levy payers plan, prepare and budget for the challenges and opportunities ahead.

It features detailed market outlooks for each levy-paying sector – beef & lamb, cereals & oilseeds, dairy and pork – alongside sector-by-sector insight into retail and consumer demand for agricultural products.

Key findings for beef and dairy include:

Beef:

- Beef production forecast +1% in 2022, as more prime cattle become available
- Overall beef consumption forecast down -1%, as easing retail demand offsets rising foodservice activity
- Beef imports forecast to grow slightly (+1%), as foodservice demand increases
- Exports of beef forecast to increase by over 10%, helped by higher domestic production and increased import demand on the continent

Dairy:

- GB milk production is forecast to end the 2021/22 season down on the year, with only modest growth in calendar year 2022, as high input costs impact yields
- Tight global milk supplies are expected to keep international markets supported
- UK imports will likely be up compared to 2021 as foodservice demand returns
- Overall, wholesale and farmgate prices are likely to remain supported through the first part of 2022

“We are currently seeing a period of inflation that is coming off the back of a shift in trade relationships with our largest trading partner, a supply chain that is struggling with the impact of a global pandemic and we entering a period of direct subsidy reductions," said AHDB Economics and Analysis Director David Eudall.

“So, whilst inflation may be transitory, we’re facing it at possibly the worst time," he continued. "What it all means is a period of higher costs for farming businesses and while commodity prices are sitting at high levels, we know that the markets are cyclical and this can change quickly."



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