The rate of agricultural input cost deflation in 2015 was the highest since 2009, estimates Anglia Farmers from its long-running AgInflation Index. But it is still slower than the fall in the prices farmers receive for their output, adding to the squeeze in farm incomes.
The Norwich-based purchasing co-operative has measured an overall reduction in agricultural input costs of 4.35% in the January 2015 - January 2016 year, in line with falling fuel and grain values. It is the largest drop in farm production costs since the 6.3% recorded in 2009. But costs in all input classes are still higher than when the AgInflation Index started almost a decade ago in October 2006.
The most significant factor in the last year’s figures has been the 20.7% drop in fuel prices, with the lower global energy values also contributing to the 13.6% fall in fertiliser values. Agrochemicals decreased by 1% in 2015, although this class has seen the smallest increase over the last ten years – agrochemicals are 123% of their value in October 2006.
Seed values actually increased by 0.7%, but this average figure includes potato seed which rose sharply to mitigate the 3.2% fall in combinable crop seed prices, in line with falling grain values of almost 15%. Similarly, the Index’s animal feed and medicines value, a fall of 7.7%, doesn’t show the full extent of the 20% lower feed prices as it is held up by increases in veterinary and animal health product costs.
While consumable input values have fallen, direct costs continue to increase. The index measures 1.9% inflation in labour and 1.5% in rent, property and office expenses. These include rises in insurance (3.5%); tractor hire (2%) and building supplies such as concrete blocks (8.5%) and cement (2.1%).
By farm enterprise, the average cost of production has fallen across all arable and livestock enterprises in the index, but in all cases, the farmgate value of the output has fallen much faster than the reduction in input costs. For example, the cost of producing cereals and oilseed rape has fallen by 5.01%, but the LIFFE wheat price dropped by an average 14.9% over the same 12 month period. Dairy production costs fell by 4.61% while the AHDB estimates that milk prices fell 15.8% in the year.
While the gap between production costs and the Retail Price Index (RPI) is narrowing – the RPI figures for bread and milk are 10.5% and 4.5% down respectively – farmgate prices have fallen faster than production costs, with the result that farm incomes continue to struggle, as recent Defra figures have confirmed.
“The main driver behind this input deflation is fuel and we have seen that in terms of a ‘pence per litre’ drop in prices, in particular for gas oil,” notes AF Group chief executive Clarke Willis. “Some of that reduction in the gas price has fed through to fertiliser prices, although it could be argued that given the significant fall in gas prices, not enough of a drop in fertiliser prices has been seen. Clearly the reduction in energy prices can be seen across a number of other sectors.”
The AF AgInflation index draws on information from the AF Group’s buying office with its £250 million annual sourcing. The Index reflects the changing expenditure of farming through a weighted average of nine cost centres and 132 cost items.