The following article was written by The Andersons Centre farm business consultant Edward Calcott.
Since the turn of the year, UK ‘Agflation’ has been soaring, driven primarily by the Russia-Ukraine conflict.
The latest estimates for April show that it now stands at 30.6% – levels not seen in decades.
All the while, general inflation, as measured by the consumer prices index (CPI) and food prices (CPI Food), have been rising at a much slower rate (circa 6%).
This means that many farm businesses are now feeling a severe squeeze on margins and this is set to continue for the foreseeable future.
The Russia-Ukraine conflict has had the most significant effect on feed, fuel, and fertiliser prices.
However, as these underpin most agricultural inputs in some form, cost increases are also showing elsewhere (for example, contracting costs, crop protection products and building materials).
Several livestock sectors are showing signs of stress. The pressure is most pronounced in the pig and poultry sectors, where feed traditionally accounts for 65-80% of the cost of production.
Dairying and grazing livestock are also feeling the strain, particularly for those farms that have not bought forward their fertiliser.
These severe inflationary pressures are happening at a time when all farms in England will be facing cuts in BPS payments, which will reach 35% by 2023.
Although for most specialised poultry businesses, direct subsidy support does not contribute a significant amount towards income.
Implications for the price of chicken
Thirty years ago, you could buy a 1.5kg-2kg ‘Oven-Ready’ chicken from your local supermarket for £2.95; now, you can buy it for £3.75.
It would have been worth double if it had risen in line with general inflation, as indicated below by the retail prices index (RPI).
Ongoing improvements within production, such as genetic development through shorter breeding cycles; advances in growing and management technology; along with good stockmanship, have kept chicken production as efficient as possible.
But all of these things are now being squeezed more than ever through inflation.
Chicken is highly sensitive to cereal prices. Feed makes up approximately 60-70% of the growing costs of a typical broiler chicken.
Add in the other farming costs of chick purchases, energy, labour, and consumables, then the retained profit percentage decreases further unless the price of chicken tracks the input of these other cost changes.
Further down the supply chain, there are similar inflationary pressures – fuel, labour, gas, energy, packaging and waste disposal, to name a few.
Exposed to volatility
The high input/output nature of chicken farming means that it is heavily exposed to inflationary volatility.
This exposure must be shared along the supply chain to ensure all links remain strong.
A lack of profit will reduce the incentive to grow chicken and reduce reinvestment to an extent.
For a method of farming which is as lean and efficient as it can be, it is difficult to reinvest to improve efficiency, there must be a limit or an endpoint which cannot be extended further.
Chicken is often seen as a basic household staple—something which has been affordable, healthy and versatile.
The average person in the UK consumes roughly 30kg-33kg of chicken a year.
This popularity means retailers could be hesitant to rapidly pass on the price increases to consumers with the interest in keeping the population fed. But at what price? We are in a cost-of-living crisis, so consumers are closely watching their spending.
There is a balancing act to be maintained between feeding the population and ensuring that all parties in the supply chain receive a fair return for their work, investment, and achievements.
If they are squeezed too much, then the supply chain could reach a breaking point. The industry has worked very hard in the recent decades to lift the reputation of British poultry. No parties wish to cut corners and undermine this effort nor see supply chains reach breaking point. That is why it is crucial to ensure fair returns are made to all.
Edward Calcott is a farm business consultant covering a range of agricultural businesses across the UK alongside running his own poultry enterprise.
He works at The Andersons Centre, which provides business advice, research and economic analysis to the agricultural, rural and food sectors across the UK, Ireland and beyond.