Increased costs in agriculture and horticulture generally do not lead to a decrease in income

On average, the increased costs do not have to lead to major problems in agriculture and horticulture. However, there are large differences between companies and sectors in the extent to which they are confronted with the higher costs, how businesses can respond to this or to what extent they can benefit from the increase in sales prices. Much will depend on the development of sales prices for the development of income the rest of the year. It is therefore important to continue to monitor the situation frequently.

This is stated in the first statement ‘Possible income effects of the war in Ukraine for companies in the field of agriculture and horticulture’ by Wageningen University & Research, prepared on behalf of the Ministry of Agriculture, Nature and Food Quality. Since the start of the war in Ukraine, the prices of energy, fertilizers and (animal feed) grains have risen sharply for many companies in agriculture and horticulture. Before the war broke out, the prices of fertilizers and energy were already rising sharply.

First exploration
The report looks at the costs, sales prices and income effects of companies in the main agricultural sectors in the Netherlands in the first 3 months of 2022. It is still unclear how much the costs and sales prices will change for the rest of the year. This study is an initial exploration, and regular monitoring of developments in the agricultural sectors will continue to be necessary to maintain a good picture of income developments.

Income under pressure
Because production in Dutch agriculture and horticulture depends on these raw materials, rising prices have consequences for production costs and revenues are also under pressure. This first report, which analyzes the consequences of rising costs up to March 2022, shows that higher selling prices of products are currently required to compensate for these costs.

Price increases versus revenue
The rise in prices of compound feeds, fertilizers, contracts and energy started as early as 2021. The war in Ukraine and the accompanying sanctions against Russia and Belarus have pushed prices even higher. Compared to 2021, feed is e.g. increased by 20% on average, fertilizer prices by 130%, labor costs by 5% and electricity and gas prices by 60%. In addition to this cost increase, revenue in a number of sectors in the first quarter of 2022 also increased compared to the average level last year.

How well companies can absorb setbacks also depends on their financial position before the war, and whether they have filled up, and whether they have made price agreements with suppliers or customers. Companies that have not taken or were not able to take action face significantly higher production costs.

To calculate the consequences of these changes, the study uses scenario analyzes. This is based on various related developments in the sectors and companies: a basic variant, an optimistic variant and a pessimistic variant for the cost development for the rest of the year. Five sectors were examined: agriculture, horticulture, milk production, pig farming and poultry farming.

Picture of the income
In all five sectors, sales prices must increase by around 15-20% to offset the cost increase in order to achieve the same revenue as in 2021 or the average of the last 5 years.

  • Arable farming: higher costs are currently amply offset in all scenarios by the high prices of feed wheat and edible potatoes. No major loss of revenue is expected here.
  • Greenhouse Horticulture: Following the sanctions, sales prices fell while costs continued to rise. In this sector, revenues will fall. For the rest of the year, revenue will probably not be enough to offset costs.
  • Dairy cattle farming: The price of milk has increased by 20% compared to 2020. If it can remain at this level, these revenues will compensate for the higher costs.
  • Pig farming: the price of fattening pigs and piglets has increased by resp. an increase of 18% and 35%. If these prices remain the same, the higher costs of pig breeding in all scenarios will be offset almost to the level of 2021. Incomes will not increase, reaching an income equal to the average of the last 5 years is a stronger price increase.
  • Poultry farming: Here too, eggs and poultry meat provide more than enough to compensate on average for the negative consequences of the increased costs.

There are big differences between companies. The extent to which the increased prices affect revenues is determined, among other things, by the agreements and contracts entered into with suppliers and / or customers.

Source: WUR

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