Sascha Griesron: Incomes bounce back – but what of this year?

This reflects what did feel like a good year for farming, with robust livestock prices, despite the ongoing pandemic conditions. However, they do not consider the sharp increase in input costs seen in recent weeks due to the war in Ukraine and its consequent interruptions to global energy and fertiliser supplies and prices.

We shall have to wait till next year for that.

These annual results – published by Scottish Government’s agricultural statistics unit for the crop year 2020 (November, 2020, to May, 2021) – provide the industry with a strong, evidence-based financial reality of a sample of Scottish farms.

The survey monitors economic and environmental performance in over 400 farming businesses in the traditionally supported sectors.

This year’s rebound in FBI, although cautionary good news for Scottish farming, only shows a return to closer to the previous years’ figure of £40,300 for 2018-2019. However, delving into the numbers for this year, there is a varying picture across different farming types, with less good news for LFA livestock farms.

These farms do not show the large bounce back in percentage terms that we see in dairy, cereal or mixed farming average FBIs and there is only a moderate increase in FBI for the LFA livestock farms, with specialist sheep farming showing a small decrease.

This may reflect the fact that these farms often have a greater proportion of income from direct payments. So, although the last two years have seen robust prices in the livestock sector, incomes have not grown, but only stabilised closer to the longer-term average.

What is interesting is how this rise in average FBI has come about as agricultural output increased by only 0.5%, but last year showed a reduction of 5% in input costs. With such volatility in input costs in recent months, it’s difficult to see that remaining the same in next year’s survey, given the recent sharp rises in fertiliser and fuel prices.

The result of note this year is the large bounce back seen across dairy and cereals, but particularly in the results on mixed farms. Mixed farms have a range of enterprises, usually livestock and cereal farming, and the results have gone from an average FBI of £30,000 in 2018-2019, dropping to £8100 in 2019-2020, and then back up higher than two years ago to £45,300 this year.

Increased output in both livestock and cereal enterprises has had the twin impact on results lifting FBI on these farms to a nine-year high.

Beyond this large financial rebound, the advantages of mixed farming can come in different forms. Traditionally, mixed farming was seen to embed economic resilience into a farming business – when grain prices were down, livestock prices were often up.

Also, the range of enterprises allowed a mixed farm to optimise use of different land types within a business.

In recent years, a return to mixed farming is seen as advantageous for different reasons, most notably in the introduction of livestock to cereal farms to improve soil health and the use of crop rotations to support farming with low input systems. That's a 'win' that is becoming ever more relevant in current turbulent times.

For example, short term clover leys can offer a form of substitution for nitrogen fertilisers and crop rotations help reduce weed and parasite burdens, supporting non-chemical management of both soil and animal health.

Again, with high fertiliser prices at the top of the farming agenda, scrutinising and adapting farming systems to incorporate these and other similar methods may help lower input costs and support a more sustainable business.

One years’ worth of results should not define direction, so these should be treated with cautious optimism, but to be kept on the watch list for next year to view the emerging five-year trend.

Although survey results are published up to 12 months behind the data occurring on farms, the SFBS remains an essential tool for monitoring the financial impact of economic shocks that occur in farming businesses.

As we move into the transition phase for a new agricultural policy for Scotland in 2025 with the unveiling of the National Test Programme this spring, this data becomes ever more important to assess the financial reality on farm and the role of future Scottish Government support in stabilising what is clearly an increasingly economically volatile picture for Scotland’s farming businesses.

Food security has moved sharply up the national agenda in recent times. Initially that was due to the triple impacts of climate change, Brexit, and pandemic recovery, but more acutely in recent weeks due to the war in Ukraine and its shock impact on fertiliser prices and other essentials.

To continue producing food and to do so in an increasingly sustainable manner, which incorporates farming for carbon and nature, farming businesses must be profitable.

Profitability supports building financial resilience, which is essential to absorb future shocks that will inevitably come farming’s way. Farmers are well used to absorbing crises that come along, with the likes of animal health problems, extreme weather events and economic changes caused by geopolitical events.

The habit in farming businesses of investing in a generational time frame helps support this change.

It remains to be seen what the current situation in Ukraine, its impact on farming input costs and indeed even input availability, will have on the annual economic picture on Scottish farms. We shall have to wait until next year to find out what that business reality is.

The numbers do not lie, though, and often tell us things that we have an instinct for, but can often be surprised by, especially in their quantified totality and sector by sector.