Financial planning essential for year ahead

All agricultural businesses in Northern Ireland (NI) have experienced significant increases in input costs over the last twelve months

Indeed, across the UK, Agflation- the term often used to reflect inflation with regards agricultural inputs now stands at 18.7% for the 2022/23 year. This is significantly higher than increases in agricultural outputs (11.1%) which shows that agriculture continues to experience a cost-of-farming squeeze. Also, Agflation, as shown in Figure 1, continues to outpace general economic inflation (CPI) and food prices (CPI Food).

Not all sectors have been impacted equally by the combination of rising costs and ouput prices in 2022. In an attempt to protect margins, some sectors have tried to reduce the use of certain inputs such as fertiliser. Meanwhile, record milk prices in the Dairy sector have helped mitigate the impact of increased input costs. 

Farm Incomes for 2023

All indications suggest that input costs are unlikely to return to pre 2022 levels for the short-term. For example, energy prices are unlikely to change significantly as the Ukraine conflict continues.  There continues to be inflationary pressure on many other inputs as individuals and businesses put up prices to try and keep up with inflation. However, there is the possibility that output prices in some sectors may begin to weaken. In the dairy sector, recent market sentiment has been cautious with some price adjustment appearing likely in the coming months. Demand, both globally and in the UK could decrease for some commodities if there is an economic downturn and consumer spending falters. Current trends suggest farm incomes will be impacted negatively in the coming year.

Careful cashflow planning required for year ahead

Financially some sectors have benefited from increased output prices such as combinable crops and dairy.  Therefore, significant profits (and consequently cash) have been generated from the 2022 year. Before cash surpluses are drawn or re-invested, it is important to review cashflow for the next 12- 18 months, as Agflation has led to a significant increase in working capital requirement. Consideration should also be given to whether now is the right time to invest, or to just focus on existing debt servicing, or even cash retention. Unexpected repairs or increased tax liabilities should be factored in when planning farm investment. The advice must be to manage current profits carefully – they may be better retained on the business balance sheet. Capital investment should be only targeted to projects with a high rate of return and/or quick payback. Using cash surpluses to build up cash reserves in the business may help mitigate future additional borrowings and be used to fund working capital and possible cash deficits. Cashflow planning for the year ahead will be essential. CAFRE has a cash flow template.

Notes to editors: 

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2. All media queries should be directed to the DAERA Press Office: pressoffice.group@daera-ni.gov.uk

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