Industry Eye: Enterprise performance and 'cost of production' the key factors as farming sector moves into a new year

The financial outlook in the UK is currently dominated by the government's austerity measures. It could be argued that what happens in the wider economy is not always reflected in our industry.

2010 will produce a wide range of farm performance and profit. The late dry spring not only reduced early forage yields but also compromised the eventual performance of many arable crops. Markets have been equally unpredictable and will remain volatile.

The striking surge in combinable crop prices from harvest onwards brings with it the classic double-edged sword, proving a welcome boost to many arable farmers' incomes but adding considerably to livestock farmers' feed costs.

Moving on to look at prospects for 2011, combinable crop 'futures' continue to look strong, but, on the back of this increase in value of outputs, some direct input costs have also risen dramatically.

The livestock sector will continue to be exposed to high feed costs and most intensive livestock producers really need to see some improvement in output prices to regain profitable production. This is particularly important for milk, beef, pig and poultry producers.

Two key factors influencing future profitability will continue to be enterprise performance (yield) and "cost of production". The balance between these two factors will become ever more important as 2011 will take us a step closer to Single Payment reform, when we fully expect incomes from direct support to reduce.

In controlling costs of production, we believe, businesses should focus energy on the areas they can directly influence. With inputs costing more, greater precision and efficiency will be increasingly important, selecting to invest inputs in land or enterprises that you know will reward you profitably will also be crucial. Growing the scale of an enterprise to achieve economies will play a part, but, so too, we believe will be the potential costs to be saved by sharing resources with neighbours.

The weakness of sterling and its importance in promoting UK farm produce abroad should not be underestimated. The increased competitiveness this offers has contributed to important overseas markets being opened up to UK sheep meat in particular. The weaker currency, does however, raise some costs and going into 2011 the value of sterling will continue to be a key factor in profitability prospects for the coming year.

From a regional perspective, in 2011 it will be fascinating to see how the two bio-ethanol plants, Vivergo on Humberside and Ensus on Teesside, will impact on the market for cereals. The combined requirement for wheat from our region will be in excess of two million tonnes for these two plants, which should massively reduce the UK exportable surplus of cereals. Whilst we anticipate mixed fortunes for farming, our general view is that prospects for all sectors of farming are becoming increasingly positive.

Andersons have published the annual Outlook publication, with specific analysis on the prospects for each sector of farming. If you would like to receive a copy, contact Andersons on 0303 313 0001.

CW 11/12/10