Soaring input costs, coupled with the ongoing cost of living crisis are hitting farm business profits hard, with the pressure on margins expected to continue for the remainder of the year.

That was the stark warning outlined in a new report from AHDB which points out that inflation, or ag-flation, will have serious ramifications for the agricultural economy.

“The impact of the Russian invasion on Ukraine is continuing to challenge global growth and is driving inflation across the board,” said Sarah Baker, AHDB economic strategist.

Add in the impact of leaving the EU and the Covid pandemic, and she said inflation is now undoubtedly the biggest issue in the UK.

“Inevitably, price inflation for essential goods such as food and fuel will force a reduction in consumption for many people, particularly those on low or fixed incomes. Retailers are working hard to keep the costs of food down for consumers, but this has consequences for agricultural producers who are already being affected by the fuel and input cost rises, squeezing business margins.”

With food price inflation rising higher and persisting for longer in the UK than in Europe, the report points to farm business margins being further challenged as they continue to feel the effects of rising energy and input costs.

According to the report, UK pig meat production is expected to fall by 6% in the second half of 2022, which may impact on export growth volume, while UK demand is also expected to weaken.

The impact of price volatility and uncertainties around milk prices and labour shortages are also expected to contribute to GB milk production finishing the 2022/23 season between 1% and 3.8% lower, year on year.

“All livestock sectors will face challenges in the coming months as cashflows are put under pressure in preparation for overwintering,” said Patty Clayton, lead analyst at AHDB.

“It’s no surprise that we see a contraction in the pig herd given the profitability challenges this sector has faced in recent months. Dairy may be the next livestock sector seeing financial challenges as we head out of summer and higher feed costs bite at a time when demand, and hence milk prices, could start to wane.”

She added that beef and lamb production looks set to increase following a period of favourable prices. However, these sectors will also face headwinds as demand will suffer on the back of food inflation and the shift in changing consumer preferences as the country moves towards lower economic growth.

Other key findings include an increase in beef production in 2022, bolstered by higher than anticipated cow throughput, while consumption is forecast to drop by 4%, as the recovery in foodservice demand slows and retail sales start to suffer as consumers switch to cheaper proteins.

Beef imports are are forecast to grow as foodservice demand remains in growth. Beef exports are also expected to rise, on the back of higher domestic production and the tight supply situation on the continent.

Looking at the sheep sector, the 2022 lamb crop is forecast higher following growth in the breeding stock, with total sheep meat production expected to return to 2020 levels. Hence, a return of more normal trading patterns is also predicted.

Demand for lamb is expected to remain extremely sluggish too, in both the retail and foodservice sectors on the back of changing preferences and rising prices.

For the pig industry, a contraction in the breeding herd is expected, leading to a 6% fall in UK pig meat production, strongly weighted towards the second half of 2022.

UK demand is expected to weaken minimally as the year progresses, as pre-pandemic trends re-emerge along with wider increases in the cost-of-living.

Export markets are likely to remain challenging too as the demand from China slows. Although exports had been increasing, higher GB pig prices and declining production may constrain future volume growth.

Imports of pigmeat are expected to grow in the second half of year as declines in demand are outweighed by a fall in production.

Dairy farmers are also likely to face huge pressures due to input price volatility, uncertainties around milk prices and labour shortages which discourage most producers from pursuing yield growth.

As a result, GB milk production is forecast to finish the 2022/23 season between 1% and 3.8% lower year on year, depending on the severity of cash flow pressures.

China’s oversupply could also limit import demand for the remainder of the year, affecting global product pricing, which coupled with low economic growth and food price inflation will weaken demand, potentially limiting further milk price increases, the report claims.