Prices and Net Farm Incomes

Farm input prices, largely driven by oil and its derivatives, have increased by 100%-300% over the past 6 months. Farm gate fuel prices are fairly strongly correlated to the Crude price and the chart on the right provides real time 1 month future for WTI Crude, indicating prices having grown from $67 per barrel to around $100+ currently(source: Investing.com). Fuel prices together with supply issues have further exacerbated the situation for fertiliser, which has seen upto 300% price increase since a year ago.

Net Farm Income Impacts – with in depth experience in quantitative agricultural economics, Demand Economics undertakes farm planning scenarios for farms. Taking into account all the input price increases and the output price volatility described by Cefetra, we have revisited some planning work that we undertook with a farm in August 2021. As background, the Oxfordshire farm is 75ha pure arable, farming chalk downland. The two charts below show the original cropping plan being considered for 2021/22 back in spring 2021, together with the final revised plan that is currently being implemented.

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Revise pie 3.png

The original plan included Winter Barley and the revised plan substituted out the Winter Barley for Rye. When we were updating and finalising the plan, it was clear that input prices were starting the long term upward trend, so we chose to look at Rye as a lower input alternative and part break crop. Taking a combination of known input requirements and yields (consistent across scenarios), the chart below indicates the estimated net farm income impact of the Original versus Revised plans, both at Sep-21 prices and now at Mar-22 prices.

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The two left hand columns in the chart show the expected Net Farm Incomes with the Original Plan (Winter Barley) versus the Revised Plan (Rye) at Sep-21 prices. The outcomes are infact relatively similar. The lower input requirements of Rye in the Revised Plan do result in less income risk associated with increased input prices as evidenced by the two right hand columns; here we have applied prices of inputs and outputs as at Mar-22 and we can see that the higher input dependency of the Original Plan has swung the Net Farm Income into negative territory (current output prices do not counter input price increases). By contrast the Revised plan with Rye results in just about break even as a result of lower input requirements and thus lower exposure to the extraordinary input price increases.

Contact Adam Donaldson at Demand Economics on 07907 581094 to find out more about our Farm Planning and Modelling service.