Economic Report on Scottish Agriculture, 2016

3.14 Farming costs (Table A1)

In 2015, the initial TIFF estimate for the total costs incurred by agricultural businesses was £2.72 billion. These costs are made up of many different components. Estimates for 2015 are very dependent upon data not available until later in 2016, and so those presented here should only be considered provisional.

Please note that in this section (3.14 to 3.14.5), increases are stated in actual terms, rather than real terms. For calculations of real terms increases, inflation since 2005 was 25.0 per cent and since 2014 was 1.2 per cent.

In 2015, the largest costs were for: animal feed (£594 million or 22 per cent of the total); consumption of fixed capital (£424 million or 16 per cent, including £174 million of livestock); hired labour (£373 million or 14 per cent); fertilisers and lime (£169 million or six per cent); fuel and oil (£115 million or four per cent) and machinery repairs (£114 million or four per cent). All other costs, totalling £934 million accounted for 34 per cent of the total.

Chart 3.20: Total farming costs 2005 to 2015

Since 2005, total costs have increased by £867 million (47 per cent) from £1.85 billion to £2.72 billion in 2015. The largest increases have occurred in animal feed (up £267 million or 82 per cent) and fertilisers and lime (up £65 million or 63 per cent).

3.14.1 Animal feed ( Tables A1, A7)

Most of the animal feed costs are associated with the purchase of concentrate feed, especially for cattle and sheep. Over the past ten years, increasing trends in the price of these concentrate feeds have contributed the most to the overall increase in animal feed costs; however, they saw an estimated two per cent fall in 2015.

3.14.2 Fertiliser and lime ( Tables A1, A8)

There has been substantial variation in the cost of fertilisers and lime over the past few years, as shown in Chart 3.21. Table A8 shows key components of the underlying price and quantity information used in the compilation of the fertiliser and lime valuation.

It should be noted that the majority of fertilisers are used in the first half of the calendar year. However, a substantial proportion of these fertilisers will have been purchased in the previous autumn/winter. This lag between purchases and usage has been accounted for in the TIFF valuation and should be borne in mind when comparing average annual prices in TIFF with monthly market prices.

Chart 3.21 shows a summary of fertiliser usage and average annual prices, expressed in terms of nutrient tonnes. Nutrient tonnes are used in order to account for different types of fertilisers which have different compositions in terms of nutrient content.

Chart 3.21: Quantity and average annual prices of fertilisers used 2005 to 2015

There was a decreasing trend in the usage of fertilisers between 2005 and 2009, with the volume increasing slightly since then. Compared to 2005, the quantity of fertiliser usage in 2015 was 27,900 tonnes lower (10 per cent), however the average price was £290 per tonne higher (94 per cent). Over this period, average prices have fluctuated considerably.

3.14.3 Hired labour ( Tables A1, A10)

Hired labour costs increased by £98 million (36 per cent) between 2005 and 2015. These costs are calculated by taking into account the number of hired workers reported in the June Agricultural Census and information on earnings from the monthly Survey of Hours and Earnings of Agricultural Workers.

Between 2003 and 2009 there was a gradual decline in the number of hired regular workers, which, prior to falling 2.8 per cent to 11,600 in 2015, had steadied in recent years. The number of casual and seasonal workers has, however, been increasing.

3.14.4 Fuel ( Tables A1, A9)

Red diesel is used as fuel by agricultural businesses. Red diesel is cheaper than conventional diesel, as it attracts lower rates of tax. The overall trend in red diesel prices has shown a steady increase since 2003, with a spike in prices during 2008. Prices remained fairly stable between 2011 and 2013, however prices have fallen sharply since then, and are now similar to those seen in 2009.

Chart 3.22: UK red diesel annual average prices 2005 to 2015

In 2015, the estimated overall cost of fuel and oil decreased by £28 million (20 per cent), reflecting the 15 pence per litre (25 per cent) decrease in red diesel prices.

3.14.5 Net interest payments ( Tables A1, A11)

Over the past ten years there has been a steady increase in the balance of farm borrowing from banks and other institutions, from £1.3 billion in 2005 to £2.0 billion in 2015. Over the same period, the corresponding cost of borrowing has varied, reflecting changes in underlying interest rates.

There was a large fall in the cost of borrowing (split into two components in table A1, financial services and interest) between 2008 and 2009 of £31 million (30 per cent) due to a decrease in the base rate of interest. The situation has been more stable since 2009, with the small increase predicted between 2014 and 2015 of £1.3 million (one per cent) due to a rise in the estimated amount of borrowing.

Chart 3.23: Outstanding balance of farm borrowing & cost of borrowing 2005 to 2015