With good growing conditions in almost all of the key production areas of the globe last year, it was inevitable that production would exceed demand. This has a disproportionate impact on prices. So, although 2014 was a better production year and costs were lower, margins were down in most sectors – especially dairy and arable.
The weak market conditions have been compounded for UK farmers by the increased strength of sterling against the euro – reducing the cost of imports and making our exports more expensive and, of course, reducing the value of EU support to the sector. If it is sustained until September, the increase in the value of sterling alone looks like cutting around 6-7% off support payments and that’s before budget cuts are taken into account
There is a clear relationship between the sterling euro exchange rate and UK farm profits (as indicated by Total Income from Farming - TIFF). When sterling strengthens, profits tend to decline.
So, 2015 looks like being a pretty tough financial year for farming. Cash flow is already under pressure as a result of last year’s lower product prices. With stocks overhanging the market and relatively strong production forecasts in both the grain and dairy sectors, and beef and sheep prices also weaker, that pressure is likely to continue through the year.
Markets are likely to remain just as volatile in the future, so farmers need to get more adept at managing that volatility on both the output and input side of their businesses. This is not unique to Scottish agriculture, but is a global issue. Successive reforms of the support mechanisms have now left Scottish & EU farmers more exposed to global prices.
Key for all farm businesses will be technical efficiency and cost control. Moving forward the industry needs to be more collaborative and share knowledge. The sector needs to continue to focus its efforts on sustainable, efficient production – monitor farms and similar groups can help with this process. Progressive beef and sheep farmers are also refocusing on grassland management and that is another positive step. These ongoing developments and the advances in technology, which provide easier measurement and recording systems, will help provide the information that businesses can use to improve performance.