Inflation, which is the metric that outlines the difference in prices year on year, is currently set to hit it’s highest level since the early 1990s. In simple terms, this means prices are rising at an accelerating rate. In agriculture, times like these, with increasing inflation rates, can be tricky to navigate. Let’s delve into why inflation can bring challenges in farming, and how to deal with those challenges.

The effects of inflation on farm

Switching on the news, or reading the headlines, most of the commentary you’ll come across shouts about the rising cost of living, increased prices on supermarket shelves and the toll that has on consumers’ purses. The lesser mentioned toll, is on the food producers, more commonly known as farmers. Anyone who deals with farm finances will have watched input costs rise exponentially. The problem comes as the gap between input costs and commodity prices reduces, squeezing the profitability on farm. Minette Batters, President of the NFU, said that although some commodities are enjoying strong prices, with positive future prices especially for milling wheat and buoyant markets for beef and lamb, exponential rises in input costs will intensify financial challenges faced by farm businesses in 2022.

So when will prices catch up?

The hikes in fertiliser and energy costs have already shown their impact, through lower production levels. According to AHDB, milk production in Great Britain was down 2% for Oct-Dec 21 on the year’s average. This reduction in supply has stimulated price increases by the processors, which will hopefully continue as labour and input costs continue to rise.

What does the future look like?

Inflation itself isn’t forecast to slow down quite yet. The rate of inflation itself could hit 7%, which would be the highest rate since 1992, this is forecast to potentially happen in April. It is then foreseen that Ofgem, the energy regulator, may increase the default energy tariff price cap. Paul Dales, of Capital Economics, projects that the rate of inflation will “stay above 4% all this year”. In summary, inflation is an issue that isn’t going away overnight.

How can farms deal with this?

All of this may seem like bleak reading for farmers, and of course the prospect of exponentially increasing input costs would concern most business owners. As accountants, a huge part of our role is to share the burden of your finances and alleviate as much stress caused by them as possible. Times like these present opportunities to assess your business structure, and potentially change things up. Keeping track of your data on farm could open up new income streams, as shown here. Whilst reviewing input costs with cost-benefit analyses can help you to assess whether processes on farm are worth their costs or not.

Our advice for all farm businesses in times like these is to get clear on your exact financial position. As they say, knowledge is power. Until you have an accurate understanding of your accounts, costs and revenue, any thought of finances can be overwhelming. If you don’t know where to start, the Gov website has many resources. If you need more specific advice for your farm, you could benefit from accountancy services.

More importantly than any of the above, talk to someone. In an industry where the work is a way of life, the pressures of farming can become unbearable. Finances, particularly increasing input and labour costs, can often contribute more than their fair share towards mental health struggles. We all know the devastating impacts poor mental health can have. In farming in particular, this is a growing problem. If you are struggling, or know someone who is, the FCN is dedicated to supporting the people in the farming community, whether it be with personal or business-related issues. You can find them and their contact information here.