The cost and profit of growing a crop vary year to year, and this variability presents a significant risk to farming economies due to the narrow margins on which they operate – and, therefore, to food security. As the Basic Payment Scheme (BPS) is phased out in England, farmers will be missing the annual payment that has served to underwrite the inherent risk in production. There is uncertainty as to whether farmers in Scotland will experience BPS cuts before 2026, but it is likely farmers will have to jump through more hoops to receive payments. In England, the agricultural transition had been creating a gradual move to alternative risk management measures. The war in Ukraine has rapidly accelerated the cost problem for farmers and highlighted for supply chains the risk of reliance on commodity markets. As costs rise dramatically because of the energy crisis, many farmers will be concerned about the impact on their margins and financial security. What are the prospects for the UK harvest in 2023?

Budgeting for 2023

We compared the costs of the 2021 winter wheat crop with a budget for autumn cultivations in 2022 for harvest 2023. The results showed the total cost of production has increased by over 50% compared to 2021, with most of this increase coming from the rising cost of fertilisers. Ammonium nitrate fertiliser peaked at around £1,000 per tonne in early 2022 but has fallen back to below £650 per tonne in May, which is still well over its 10-year average. The agricultural buying group AF reported that agricultural inflation increased by 24% in the six months to March 2022.

In mid-May 2022, futures prices for November 2023 were over £280 per tonne. Our modelling used a more conservative estimate of £260 per tonne, and predicted margins increase from 2021 levels by 10%. The significant increase in upfront costs in 2023 means that despite an overall increase in margins in cash terms, the return on capital is lower in 2023 (41%) than in 2021 (57%) – see charts below.

The extra working capital needed to fund the rise in input costs for 2023 is substantial. Narrowing margins and increasing costs will be compounded by the further loss of BPS and may contribute to risk-averse cropping decisions this autumn.

Wheat has an advantage over other crops, in particular fresh produce, as it is globally traded, meaning the price is influenced by the global supply and demand dynamic. Agricultural products that aren’t traded as global commodities such as fresh vegetables and meat are being significantly impacted by increasing input prices yet this impact hasn’t fed through to an increase in output values, as these prices are set locally. This is leaving these producers in a financially precarious position.

Farmers who choose to crop will need to mitigate their risk, and one way of doing this is through achieving the economically optimum application of nitrogen, rather than the agronomic optimum. The chart below demonstrates the yield and economic impact of varying fertiliser application rates. Farmers looking to reduce nitrogen costs will be reassured that margins are preserved at low application rates in a high-wheat/high-cost environment. Still, it is clear that supply chains both upstream and downstream of farming need to step into the breach, to shore up farmers’ confidence that the risk of production is worthwhile, and so ensure commodities are available for trade.

Economising inputs

Retailers and larger first purchasers of farm produce are increasingly interested in environmental sustainability, therefore, it may be that their urgent interest to secure supply from UK farmers comes with strings attached. Farmers who have already started to measure and ameliorate their environmental impact will be at an advantage in proving their business resilience.

Our anecdotal research of Savills rural consultants suggests an even split between those who think the UK wheat area will increase as a result of the Ukraine crisis and those who think it will decrease. Bearing all this in mind, it may well be bank managers who have the biggest role in determining which of these views will be correct.

Influencing farmer behaviour

Environmental delivery comes at a cost. While agricultural policy budgets can go some way to make up the shortfall in farmers’ management costs, supply chains have their role to play too. Longer term and fairer contracts, alongside pricing strategies to incentivise positive actions, will help farmers have confidence in business viability, as indicated by Arla Foods’ recent commitment to pay dairy farmers more based on their commitment to undertake carbon mitigation activities. Morrisons’ partnership in the School of Sustainable Farming at Harper Adams University shows how investment in research and skills has a big part to play. The government signalled that it was prepared to take a bigger role in regulating supply chain behaviours in the Agriculture Act, including concepts of fair dealing and encouraging Producer Organisations. It remains to be seen what legislation it will bring forward, or whether the private sector will be left to its own devices in developing more sustainable supply chains.

Will a food crisis force innovation?

If crisis is the mother of innovation, what could we expect?

Previous generations have responded to food security concerns by increasing production. Technological investment has focused on high input, high output models and unit efficiency rather than system efficiency.

As we face a collective resource crunch caused by conflict in the breadbasket of the world, it is important we don’t make the mistakes of the past.

Regenerative systems certainly have a role to play in maximising farm system efficiency and resilience, but food producers and consumers may now be encouraged to adopt approaches to sustainable food production that they have previously had the privilege to eschew.

Here are three food-tech innovations where conflict may accelerate adoption of more sustainable solutions:

1. Controlled Environment Agriculture: Farming stalwarts suggest digging up land to grow food, much as we did during World War Two. Outdoor growing seasons are short and slow, but controlled environment systems are unlimited in their output. Greenhouses and tower systems could bring vital nutrition close to consumers.

• Needs: ££, planning, markets

2. Nitrogen-fixing wheat: Plant breeders have made great progress with precision breeding techniques to accelerate natural evolution, but some innovations rely on advances that are deemed a step too far. GM is one of them. Scientists have been working on introducing the nitrogen-fixing abilities of legumes into common wheat varieties, but the GM techniques remain controversial. Wheat that doesn’t require artificial nitrogen would solve resource pressures but remains decades from realisation.

• Needs: legislation, ££, science

3. Waste as feed: Every 1kg of food waste releases 2.5kg of CO2, particularly when it ends up in landfill. Traditionally, food waste was recycled as feed for pigs and chickens, but biosecurity problems ensued with catering waste. Insects could solve the recycling issue by repurposing post-consumer waste into biosecure feed for animals, with the twin benefit of avoiding using feed sources that could be suitable for human consumption and reducing greenhouse gas emissions.

• Needs: legislation, partnerships, ££

_{Read the other articles within Spotlight: Agri-food sustainability below}