Despite soaring costs of production, some buoyant output prices for arable and livestock farmers ensured a much better 2022 than anticipated, compared to the coming year which is expected to see farm profits come under significant pressure.

That is the warning from Farm Business Consultants, Andersons, who claim 2023 will be marred by cost inflation which will continue to be high whilst output prices may weaken due to an economic slowdown.

In its recent report, it says cost increases have been the big topic in farming in 2022 which look set to continue into 2023. Andersons is however predicting that total UK farm profits in 2022 will fall compared to 2021, but ‘only’ by 15-20%. This is because of two main factors – rising costs will be partly offset by rising income – driven by high prices in two of the biggest sectors – dairy and combinable crops.

Secondly, the full effect of cost increases will not have been felt, even in 2022. Much fertiliser was purchased at low(er) prices in 2021; electricity prices only started to peak this autumn; and many costs linked to general inflation levels in the economy (such as labour) take a while to catch up with the unexpected surge in price levels.

Looking to 2023, it says higher costs in some areas appear ‘baked in’, for the short-term at least, with no signs that energy prices are going to decrease whilst the Ukraine conflict continues.

Read more: Prepare to pay tax this coming year end as profits soar

In other areas, such as the wage rates for seasonal workers, the 15% increase in 2022 is irreversible. There will also be inflationary pressure on many other inputs as individuals and businesses put up prices to try and keep up with inflation.

Output prices in some sectors may also weaken, Andersons says.

In the arable sector global markets will have had more time to adjust to the restrictions on Ukrainian exports (or, indeed, shipments may increase in volume). Demand, both globally and in the UK could decrease for some commodities if there is an economic downturn and consumer spending falters.

Andersons forecast for 2023 currently sees UK farming profits dropping by up to a third. This puts them back levels last seen in the difficult years around the turn of the millennium. These forecasts only look at the aggregate position for the whole UK farming industry. There will be huge differences between sectors and, indeed, individual businesses depending on how costs and income changes interact.

In Scotland, it pointed out that the confirmation of at least two further years of BPS payments (2023 and 2024) has provided some short-term certainty, but what lies ahead is still unclear, particularly for beef and sheep farmers in more marginal areas.

"While we have some hints as to the direction of travel, the real crux will be the amount of money available and what allocation will be given to each of the four tiers. There is the possibility that the Scottish Government could provide an increase in funding for these schemes after 2024, but this currently seems politically unlikely.

"It is more probable that the amount of money available will be lower in real terms and, most certainly, lower base payments look inevitable. Whilst there is more short-term certainty in Scotland in subsidy support when compared to England, it is crucial that the plans are set out in more detail with a clear timetable to allow for farmers to plan and adjust accordingly."

Although the immediate future looks challenging, Andersons was quick to point out the farming sector has faced difficult times before and has come through them. Ironically, 2023 marks 50 years since the founding of Andersons the Farm Business Consultants – then David Anderson and Co. It is easy to state that the agricultural and food industries are ‘unrecognisable’ from the early 1970’s. See graphs.