Five strategies for mitigating cost pressures in agriculture

21.03.2022
Justin Wright
Agriculture
Justin Wright, Manager for Lovewell Blake

An ‘unholy alliance’ of pressures on costs means that farmers need to put in place anti-inflation strategies, says Justin Wright of Lovewell Blake’s specialist Agriculture team.

Justin Wright, Manager for Lovewell Blake

Even before the conflict started in Ukraine, which looks set to put further pressure on inflation, agriculture was already facing massive rises in their costs, with an unholy alliance of rising labour costs, soaring energy bills, record fertiliser prices and increasing interest rates all coming together to squeeze margins in the sector.  So what can farmers do to mitigate this inflationary spiral?

Much of the increase in costs is beyond the individual farmer’s control.  April sees the headline National Living Wage rising by 6.6%, with a further 1.25% increase in employer’s national insurance contributions to fund the new Health and Social Care Levy.  That means a rise of almost 8% in labour costs in one fell swoop.

Alongside this, fertiliser costs are at an all-time high.  This might be a short-term blip – or indeed, in a world of conflict and uncertainty it might be more long-term – but either way it will put a disproportionate burden on arable costs this year at least.

Energy costs were already rising exponentially, and the conflict in Ukraine will simply exacerbate a situation where they have already risen by 25-30%.  For any farmer with a heated grain store, chicken shed, pump or borehole, that is going to make a big difference.  And in April the cost of red diesel will rise by even more than that available at normal pumps.

Meanwhile, last month’s interest rate rise is likely to be the first of several over the coming months, which means that borrowing to fund investment will become more expensive, and farms operating on bank overdrafts are likely to see their finance costs harden.

Of course, there is little that anyone can do to change any of these factors; they are the result of worldwide pressures, political decisions and conflict. So what can the individual farmer do to mitigate the effects of this explosion in costs?

The first thing to do is to assess your assets and ensure they are working as productively as they can for you.  If they are not, or they are surplus to requirements, now might be a good time to divest yourselves of them.  With the price (and availability) of new equipment being squeezed, the market for second-hand equipment is vibrant right now, so it could be a good time to sell those assets which you are not fully utilising.

Secondly, despite rising interest rates, it could be a very efficient time to invest in assets which will make your business more efficient (especially if this will reduce your reliance on ever-more expensive labour). 

The ‘Super Deduction’ announced by Rishi Sunak in last year’s Budget means that 130% tax relief is available on capital investment until March 2023, and the amount is unlimited.  The only caveat is that the business has to be a limited company, so now might be a time to review the structure of your business to see if incorporating to take advantage of an extremely generous tax break might be a good idea.

Thirdly, it is more important than ever to maximise your output prices.  Cereal prices are currently at record levels, and this will mitigate against rising input costs for now; but the inevitable peaks and troughs in prices will have greater consequences in the near future as costs continue to rise.

With limited supply (and it is likely to be more limited if the Ukraine conflict drags on), producers are in a strong position to negotiate better prices.  It may be worth larger-scale operations considering forward pricing, which would give the certainty to invest in inputs for more than one year, locking in today’s prices.

Fourthly, it is more important than ever to spread your risk, and look at diversification into activities which have lower levels of inputs.  That might mean creating holiday lets or business units, but it might also mean taking on contracting work for other farms, getting paid for doing the work, but not having to carry the costs of, for example, fertiliser.

Finally, now is the time for a thorough review of what your business does, and to consider how you might innovate.  Farming can be a notoriously conservative sector, preferring to do something the way it has always been done.  But that might be a luxury we increasingly can’t afford.

It’s time to review cropping policy, consider other uses for the land such as rewilding, carbon capture, creating woodland, and so on.  Not only can this reduce costs, but it can also open up funding streams which may not currently be available – especially for smaller farms.

One thing is certain: the upwards pressure on costs is not going to disappear anytime soon.  A combination of where we are in the economic cycle, the financial hangover of two years of pandemic-related spending, and the dark shadow of conflict in Europe will all come together to keep inflationary pressure high.

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