The Andersons Centre has confirmed a cost-of-farming squeeze is now a reality within the UK market.
The company’s ‘AgFlation’ figures for the month of July contain an index of agricultural output prices for the first time.
The July estimates put ‘Agflation’ at 23.5% annually, more than double that of agricultural outputs (10.1%).
The Agflation index builds upon Department of Environment, Food and Rural Affairs (Defra) price indices for agricultural inputs, and weights each input cost (e.g., animal feed) by the overall spend by UK farmers.
Andersons then provides a more up-to-date estimate of the price index for each input cost category.
As the ‘official’ Defra figures are updated, Andersons Agflation estimates are also adjusted to take account of the Defra updates.
When ‘Agflation’ is plotted against output prices, food inflation (denoted by consumer price inflation (CPI) Food) and general economic inflation, which stand at 9.8% and 9.4% respectively, it becomes apparent that there is a cost-of-farming squeeze taking place.
In the months preceding June 2022, agricultural output prices generally rose in parallel with ‘Agflation’, albeit at a slightly lower rate. However, since then, these indices have diverged considerably.
Whilst recent falls in commodity grain prices have been the main driver, it also suggests that consumers are struggling to afford rising food prices and that retailers and food service providers are reluctant to pass on further increases.
However, with energy prices set to rise further towards winter and the Bank of England projecting that inflation will rise to 13% by year-end, the extent of the challenges facing the UK economy remains stark.
According to Andersons Centre analysts, fuel, fertiliser and feed costs will continue to affect the UK’s farming economy. Therefore, ‘Agflation’ will remain at elevated levels for this year and beyond.
Some sectors are better positioned to withstand these increases than others.
The latest official figures confirm that milk prices are up by 41% since July last year. Cereal prices, although lower recently, are still around 29% higher than a year ago.
However, livestock prices, generally up 10-19%, are not rising as quickly as ‘Agflation’, with egg and fresh vegetable prices falling.
Several of these sectors have been struggling in terms of profitability. Additional inflationary pressure on inputs will stretch working capital resources further.
All of this brings into sharp focus the role that farm support measures will play into the future.