Cost of living to hit farm business margins in 2023

High

The damaging effects of inflation, the supressed economic activity as a result of reduced spending power and the lack of flexibility in the labour market will converge to continue affecting farm business margins. Farmers are particularly hard hit, facing higher input costs while simultaneously facing a price sensitive consumer market for their produce.

Sarah Baker, AHDB Economic Strategist, said: “The main issue with inflation is it drives down the real rate of growth in an economy, erodes households’ disposable income and leads to more cautious spending patterns. Coupled with rising input costs for farmers, the industry will face ongoing dual challenges this year.

“As inflation subsides, it doesn’t mean that prices are dropping, rather that they have stopped rising as quickly as they were before. Therefore, peoples’ living standards will take some time to catch up, depending on income growth. Consumer confidence, along with demand, will take some time to recover, despite inflation dropping as it is expected to during 2023.”

AHDB’s Agri-market outlook is produced every six months and examines the factors likely to affect farm businesses, helping levy payers plan and budget for what may lay ahead. The analysis features detailed market outlooks for each levy-paying sector covered by AHDB’s remit - beef & lamb, dairy, pork and cereals & oilseeds. The latest outlook also examines trends in farm business inputs and consumer demand.

Key findings from the beef outlook include:

• Production is to grow slightly in 2023 due to higher cattle availability, by an estimated 0.6%

• Consumption is forecast to ease by around 2% as cost-of-living pressures consumer budgets

• Imports are expected to fall by around 2%, driven by easing domestic demand

• Exports could grow slightly by around 3%, reflective of the domestic market balance

Where next for GB cattle prices?

GB deadweight cattle prices have shown remarkable strength so far in 2023, with prime cattle and cull cows posting weekly gains since the start of the year. In the week ending 25 February, the GB overall average steer price reached 480p/kg, up 71p from the same week a year ago. At the same time, the overall deadweight cow measure averaged 379p/kg, up 80p year-onyear.

The price rises come despite pressures on retail and consumer spending, linked to higher cost of living

and price inflation. So, what other factors are at play?

The UK beef market came into 2023 following a tighter supply situation in 2022, keeping prices elevated. A slight uplift in production, balanced with relatively stable imports and growth in exports pointed to lower available beef supplies for consumption during the year. This was particularly prevalent during the third quarter. Supplies grew in the fourth quarter as cattle slaughter rose ahead of Christmas and winter housing, but firm demand kept prices high.

Beef markets are also currently tighter across the EU and indeed elsewhere in the Northern Hemisphere, particularly the US. This has been driven by production declines, which are expected to persist in 2023. Such trends could suggest that underlying support for cattle prices generally will remain in 2023. A relatively weak outlook for sterling could also be beneficial for beef trade flows. However, we must consider the other end of the market – demand. Our latest outlook points to lower UK domestic consumption in 2023, driven by inflationary-related cutbacks in spending. Cheaper cuts are expected to be favoured by consumers, and so how the value of the carcase is balanced with marketing of more premium cuts will be key to farmgate returns. Elsewhere, EU consumers have also not escaped the challenges presented by cost-of-living pressures.

As we head into Spring, cattle prices continue to rally, with live sales also seeing record returns. Reports of beef stocks in store running tight supports a momentum in this trend. How consumers have responded to the current economic challenges through February and March is the next piece of the puzzle.

For all the latest industry data, analysis and insights from the beef sector to help inform your business decisions, visit the beef markets page of the AHDB website https:// ahdb.org.uk/beef/beef-markets