Prospects for Scottish agriculture in 2023 will continue to be heavily shaped by global forces. While the chief forces to be aware of, coupled with how the main types of farming practised across Scotland might be affected are given below; as ever, it is how businesses adapt to changing circumstances that will be key to individual success.
Ukraine war pivotal
The conflict in Ukraine will continue to hit western European agriculture badly because 40-50% of EU gas is imported, mainly from Russia. Fortunately, gas storage had been successfully topped up in 2022 and despite the recent cold snap, no power cuts are expected for the 2022/23 winter. Energy, however, is extremely expensive, especially fertiliser and electricity. Topping up European gas storage in 2023 will remain very expensive as no gas will come from Russia. Energy forecasters do not expect new global gas production to come on-line until 2024.
The recent easing in oil prices has sparked some optimism for lower diesel prices. However, much will depend on how the west’s recently implemented oil price cap on Russian production works. The scheme aims to curtail Russian income from oil sales rather than interfere with global supply and prices.
Cost of living crisis to continue
Stagflation is the term given to both inflation and recession hitting the economy at the same time. Neither economic condition is good alone, but together normally mean a big squeeze on household incomes and hence consumer demand. As people must eat and drink, demand for farm produced food products is less badly affected than for most other sectors of the economy. Nevertheless, recent retail surveys reveal how consumers are responding, switching to cheaper meats, eating out less, reduced interest in paying premium prices for products with health and environmental attributes.
In short, with continued food price inflation forecast, albeit at a declining level, cost will be the main driver of food demand, which will feed through to farmgate prices. For farmgate prices are not generally set by cost-plus systems: egg producers certainly found that out in 2022.
Higher interest rates will further dampen consumer spending. Though the recent Bank of England economic forecast points to inflation returning to target in a couple of years’ time (from the current 10.7% down to 2%); another lift in the base rate to 3.5% was recently announced. Further increases in the base rate are anticipated: how these impact economic growth and jobs is the big concern.
Trade deals and exchange rates
A further consideration in setting the base rate, is the exchange rate, which has big implications for trade. While a weak pound helps agriculture by making exports more competitive and imports less so, it also pushes up the cost of farm inputs, much of which come from abroad. Further, as most global commodity markets are priced in US dollars, the strong dollar is exacerbating input costs like fuel and fertiliser. The good news is that the latest forecast from the Federal Reserve, the US Central Bank, is for inflation to fall quicker than previously expected so although further rate rises are expected, the peak interest rate should be less than previously forecast. Notably sterling has recovered sharply against the US dollar in recent months.
Trade in the coming year will also be influenced by how several recent trade deals play out. Limited mention of the Northern Ireland protocol of late suggests that negotiations are currently intense. If an updated protocol can be agreed, it could improve the overall UK-EU trade deal by reducing paperwork. A vet deal to eliminate most of the sanitary and phyto -sanitary controls may be key to an agreement. Even so, it is hard to grasp why the UK has implemented few checks on imported food products to date.
As for the sterling-euro exchange rate, at the time of writing, it is almost exactly where it was five years ago at 87p/€. For if there are considerable clouds over the UK outlook, the half-baked mechanism to manage the euro could well come under strain again in 2023, weakening the euro.
By the end of 2023, the first shipments of meat from Australia under the new UK-AUS free trade deal should have landed. Ratification is expected soon by the Australian parliament. Here, the deal is already ratified (by default), but still needs passing into law. It will be interesting to see how the Australians target the big UK market. On a more positive note, one factor that still offers some protection from imports from New Zealand and, potentially, Australia is the continued unreliability of chilled container freight – a legacy from Covid.
And look out for the UK joining the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) in 2023 to get better access to the region of the world forecast to grow most in the coming decades – Asia. The Chinese also have their application in.
Covid and animal disease
While the direct impact of covid is receding here, China’s Zero Covid policy is badly disrupting the Chinese economy. As a massive importer of food and fuel and exporter of agrochemical products and fertiliser, what happens in China has global impact. The forced lifting of lockdowns could badly affect China given the low proportion of elderly Chinese fully vaccinated. Growing geopolitical tensions add further uncertainties, a reason why the Aussies and Kiwis were pleased to sign trade deals with the UK.
Here, bird flu (which also originated in China) is the disease most likely to impact egg and poultry production in the months ahead especially as it is now rife in the wild bird population.
Farm policy status quo in Scotland
Agricultural support for Scottish farmers will change little in 2023, which given the considerable volatility/uncertainty affecting prices and costs, is a blessing.
By comparison, English farmers 2023 area payments will be 35-55% less than their 2020 payments depending on payment band; with the apparently ‘generous’ capital grants for updating slurry storage and improving productivity being funded from reallocated area payment cuts. However, given concerns about the negative impact on food production of fully removing area payments, plus the difficulty of designing workable environmental schemes, could Defra volte-face and keep some area payments long term?
The new CAP programmes start in EU countries in January 2023. Again, there is a clear funding strategy of “robbing Peter to pay Paul”. All member states have been forced to allocate a quarter of area payments to eco-schemes though they have been given considerable scope to customise such schemes to their own national circumstances.
Scottish farmers also appear under less pressure to reduce greenhouse gas emissions than many other countries in 2023. Scotland is adopting a nudge policy to encourage farmers to do the right thing to cut emissions through the likes of the National Test Programme. But Dutch dairy farming will be cut by buying out some farms, the Irish are considering similar action for its sucker herd. While Kiwi farmers are protesting loudly about proposals to tax them from 2025 to help meet their national climate change targets.
Impact on main Scottish farm types
Hill farms less exposed to input cost inflation
With hill farm livestock sales typically concentrated in the autumn; the prices of store lambs, breeding sheep and weaned calves will be set by the trade for finished lambs and cattle.
Cost of living pressures both here and Europe point to some softening of prices. Excellent growing conditions in the summer meant that any cutbacks in fertiliser did not show up in pasture and silage yields. Mother nature may not be so helpful this year.
Pressure on upland cow numbers
Upland farmers with cattle will be hoping that the spring yearling sales set a positive tone. Certainly, cattle supply globally is predicted to be tighter. Excellent demand for mince beef is encouraging farmers to cull any passengers especially as silage has become a very expensive feed given the cost of fertiliser and contracting. How upland farmers rebalance their farms may become clearer in 2023.
Only one direction for milk prices
Most dairy experts are pencilling in a milk price drop. Fortunately, most milk contracts have reached levels where some, limited, reversal will be manageable. As dairy farming is very exposed to input cost inflation, any softening in feed costs should lower production. Good use of slurry and generally high soil indices also offer savings in the fertiliser bill. Notably, given all the talk of conditions being attached to future support in Scotland, dairy farmers already operate to conditions (e.g., non-euthanising calves) set by their milk buyer.
Crop farmers holding their breath
Cereal farmers had a pretty good 2022 crop year thanks to favourable 2021 input prices and strong prices. With the 2023 crop growing on high costs, growers are keeping a close eye on how developments in Ukraine affect the global grain market. Many farmers have already modified crop rotations to reduce costs, some are also experimenting with tie-ups with livestock farmers to improve returns and build soil carbon.
Sympathy due to pig, poultry and fruit farmers
Finally, spare a thought for the sectors that had a terrible 2022. Intensive livestock profitability will improve if grain prices ease lower and maybe egg producers will get a better deal with supermarkets. But resolving labour shortages may remain difficult.
Kev Bevan, 07368 825877
Sign up to the FAS newsletter
Receive updates on news, events and publications from Scotland’s Farm Advisory Service