Most arable and livestock farmers have enjoyed two good years of returns, but the tide has turned – agflation, falling ex-farm prices and a bigger tax bill look set to put the brakes on many individual businesses over the next 24 months.

That was the stark warning from Richard King and Michael Haverty of Andersons Farm Business Consultants, who stressed that cost inflation is resulting in falling consumer demand on a global scale for beef, lamb, cereals and dairy products.

Speaking at their Spring Prospects for Agriculture seminar, at Ingliston, Mr King said: “We have seen some record profits in 2021-2022, but farming is going through a period of significant change. The environment is now a driver of agricultural land use and will continue to be so. We also have increased competition for land from diversification, woodland, peatland and other biodiversity drivers.”

He added that costs will continue to be the big issue this year which will affect grazing livestock producers most throughout 2023 and 2024. Figures for their typical beef and sheep ‘Meadow Farm’ in England show a deficit business surplus in the coming two years due to falling basic payments. However, average producers on the same ‘Meadow Farm’ in Scotland and Wales, where basic payments remain unchanged, are also likely to show a deficit, particularly in 2024, due to increased costs.

Figures for Andersons’ average dairy farm in Scotland, made up of 200+ cows plus followers on 130ha part rented ground on all year round calving, show a well run dairy will deliver good profits, but with higher costs of production – 42.7p per litre in 2022/2023 compared to 30.2p in 2020/21 – the business surplus will be nearer 2.4p per litre compared to 5.4p.

The farm business consultant’s typical Scottish arable unit, also shows a business surplus for 2023, but it is significantly down at £147 per ha compared to a colossal £939/ha in 2022 and £597/ha in 2021, again due to the increase in costs but also reduced demand for cereals.

“UK grain prices have been lack lustre because there is not the same demand for wheat when pig and poultry production are down 9% and 7% respectively,” said Mr Haverty.

“UK cereal and oilseed markets were better supplied in 2022 than in recent years, with wheat in particular 1.9m tonnes above the five-year average at 15.5m tonnes, and both barley and oats are marginally above the five-year average. But, with AHDB’s early bird survey pointing to an increase in winter cereals, there is potential for good malting barley premiums when there will be less spring barley sown, this year,” he added.

But while increased costs and reduced farm commodity prices are set to become the norm for all in 2023, Scottish farmers are fortunate in that the policy framework will remain the same until the end of 2024. However, while payments are being maintained in nominal terms, Mr King warned that the high level of inflation means they have dropped sharply in real-terms, and, many will also have additional tax to pay from two good years.

Change is also on the way in Scotland, and from 2025, conditionality will be added to the Basic Payment Scheme (BPS) and probably coupled payments and LFASS too.

Andersons said the National Test Programme is already underway to prepare for the new support structure. Much of it covers ‘baselining’ to find out what farmers are doing at present in areas such as carbon and biodiversity to determine how future improvements can be guaged. Detailed rules on what is required under ‘conditionality’ in 2025 however will only be released early 2024.

The new system will be based on four tiers of payments with Tier 1, expected to look a bit like the Basic Payment albeit, given budgetary constraints, it seems likely such values will be lower than they are at present. Farmers will also have to ‘do more’ to get these payments as the essential standards – actively farming, improve biodiversity, efficiency, animal health and welfare, greening etc – introduced in 2025 will roll into the new Tier 1 although the requirement for a Whole-Farm Plan is still being considered.

Tier 2 will offer greater payments to farmers who meet the Government’s policy goals in areas such as carbon and biodiversity (soil cover, input efficiency, crop rotations, min-till, field margins, headgerows, animal nutrition, health and breeding, and grazing management etc).

Other ‘Elective payments’ for supply chain support, organic farming, innovation and targets species and habitats could be available in Tier 3, alongside Complimentary Support’ in Tier 4 possibly based on continued professional development of farmers, advisory services, woodlands, with LFAs and coupled support for beef and sheep perhaps considered. However, no payment rates are as yet available.