Another year of high Agriculture Production Costs expected in 2023

A new report, by economists at Teagasc, provides the latest estimates of average incomes for various farm types in 2022 and looks ahead to future prospects by forecasting farm incomes in 2023.

In 2022 farmers faced considerable uncertainty relating to input and output prices which had an impact on production decisions. This uncertainty was largely driven by Russia’s illegal invasion of Ukraine which had immediate consequences for the energy, fertiliser and feed markets and subsequently also had an impact on farm output prices.  Weather conditions in 2022 were unusual, with exceptionally dry conditions over the summer having a negative impact on grass growth, but generally benefitting cereal production.

For farm incomes the outcome in 2022 was mixed.   Dairy farms achieved dramatically higher incomes in 2022, along with Tillage farms, compared with last year.   Incomes on Cattle farms, Sheep farms and Pig farms are estimated to have been lower in 2022 than in 2021.

On dairy farms a significant increase in income in 2022 is estimated to have occurred, with the average Irish dairy farm income likely to be up by 50% on the 2021 level. This increase would take the average dairy farm income figure to €148,000. Irish Dairy farmers have benefitted from a 44% increase in milk prices due to the lack of growth in global milk supplies this year. However, on average milk production costs were about 8 cent per litre (30%) higher in 2022. Irish milk production in 2022 was, more or less, in line with the 2021 level, with dry conditions over the summer of 2022 limiting grass availability.

The average income on Cattle Rearing farms is estimated to be down 20% in 2022, as higher production costs more than offset the benefit of higher cattle prices. The average Cattle Rearing farm income is estimated to be €8,700 in 2022. This decline is forecast despite the positive influence of the Fodder Support Scheme on farm incomes.

The combination of higher finished cattle prices and the contribution from the Fodder Support Scheme have offset most of the increase in production costs on Cattle Other farms. However, the average income for Cattle Other farms in 2022 is estimated to be down 2% in 2022 to about €16,900. 

Sheep farms benefitted from higher lamb prices in 2022, which remain at record levels, and payments via the Fodder Support Scheme, but have also had to deal with higher production costs. The receipt of payments from participation in the Sheep Welfare Scheme boosted gross output, but was not sufficient to cover the input cost increases. The average income on Sheep farms is estimated to be down 4% in 2022. This would bring the average Sheep farm income back to about €19,800 in 2022. 

For the Tillage system, favourable weather led to higher yields and favourable moisture content in 2022 for most crops. However, winter barley yields were lower due to virus impacts. Tight global grain supplies and uncertainty regarding export potential from Ukraine boosted cereal prices at harvest time. Even allowing for the rise in production costs, it is estimated that average tillage farm income is up 10% at about €64,000 in 2022.

Pig prices rose gradually over the course of 2022 to reduce monthly losses. Nevertheless, despite this increase and significant state support to the sector in 2022, the average pig farm will have incurred losses approaching €422,000 in 2022. 

While the average farm income in 2022, is up considerably, the increase is entirely driven by the strong performance of the dairy sector. With the dairy sector excluded, the average income across the other sectors is down considerably.

2023 Outlook

Looking ahead to 2023 the uncertainties created by Russia’s invasion of Ukraine are likely to remain. Global economic growth rates are set to slow, with some regions moving into recession. This could have some negative impact on food demand.

There are few signs of any relief in 2023 from the high production costs that were observed in 2022. Overall no significant, change in production costs is forecast across all sectors in 2023. 

Looking at forecast average input prices in 2023 relative to the average in 2022, fuel prices may fall slightly, but feed prices are likely to be higher. While it is difficult to forecast how fertiliser prices will develop, very little change is expected for the annual average fertiliser price for the fertiliser year which starts in October and ends in September. 

Milk prices are likely to fall in 2023 by 15%, as global milk production growth resumes and demand growth eases. The average milk price in 2023 should still be sufficient to cover the production cost increases experienced over the last 18 months. Nevertheless, margins will remain high in 2023 and there should be a return to growth in milk production of perhaps 4%. While dairy farm incomes are forecast to be lower in 2023, the forecast average dairy farm income of €104,000 would still be one of the highest recorded.  

Cattle prices are forecast to increase in 2023 and particularly during the first quarter of the year. Stable volumes of beef production (domestically and in key export destinations) are expected to constrain rising cattle prices in the second half of 2023. The forecast is that average finished cattle prices will be 4% percent higher in 2023 and that young cattle prices will increase by 5% in 2023. The availability of additional support under Pillar II of the new CAP will benefit cattle producers. Average incomes are forecast to rise on cattle farms in 2023, with an increase of 11% in prospect for cattle rearing farms to €9,700, and an increase of 2% for other cattle farms to €17,300.  

Lamb prices are forecast to increase by 2%, on average, in 2023.  On farms with mainly Sheep, incomes will continue to be boosted by the receipt of payments from CAP Pillar II schemes. In 2023 these payments will be from the new Sheep Improvement Scheme. With a forecast 4% increase in costs, the average income on sheep farms in 2023 is forecast to decline by 2%, leaving the average income at just under €19,500.

Cereal prices are forecast to be lower in 2023.   The high cereal yields achieved in 2022 are unlikely to be repeated in 2023. There is likely to be little relief on the cost side, but some additional support under the new CAP will provide some benefit, such as the ACRES scheme and additional protein payments. Overall, the average tillage income in 2023 is forecast to fall by 48% to €33,000. 

Pig prices are forecast to continue to improve in 2023. A 22% increase in pig prices is forecast and this would restore profitability in the sector to a more normal level. Pig production is expected to fall slightly in 2023 as an outcome of the contraction of the sow herd that occurred in 2022.

Traditional average farm income measure has become redundant

With the sharp increase in dairy farm income of recent years, movements in dairy farm incomes heavily determine the average farm income in Ireland and are increasingly detached from income outcomes for most other Irish farm systems.   This traditional average farm income measure has become redundant as an indicator of typical farm income performance across the wider agricultural sector and a forecast of average income for 2023 is therefore not reported.

All of these income calculations are in nominal terms, which means that they do not factor in general inflation and the impact that this has on the purchasing power of incomes earned in agriculture. With general inflation now at its highest level for many years, a farm with a stable nominal income will experience an appreciable decline in real income. 

The Teagasc Outlook 2023, Economic Prospects for Agriculture, is available to view and download at https://www.teagasc.ie/publications/2022/outlook-2023—economic-prospects-for-agriculture.php