Overall, potato growers can expect to incur modest changes in production costs during 2021, but as is the case with any business, the ability to retain savings made in one area while minimising the impact of increases in others, will be determined by the priorities, and buying decisions of the management.
At the headline level, says Nick Blake of Andersons Eastern, the changes will be felt most acutely in fuel, fertiliser, and energy though the timing of any purchases will influence the actual cost change.
The change in the cost of some inputs, however, is being driven by more than just the market fundamentals of supply and demand proving that it pays to watch the politics of world affairs when pondering what the future may hold.
Gas oil prices, for example, were roughly 20% lower at the end of 2020 than at the same time in 2019 despite crude oil prices falling by just 9% over the same period. The travel restrictions brought on by the coronavirus pandemic may have contributed to a collapse in demand during 2020, but the decision by the major oil producers to maintain production at levels above what was needed was a deliberate attempt to drain North American shale producers of cash.
Oil consumers everywhere benefitted from the deliberate oversupply of crude oil on the world, but this price war now appears to be over. Crude oil prices are now at their highest since February 2020.
Crude oil prices in 2020 fell to $18/barrel before rising 170% on the back of tightening supply and increasing demand
Source: US Energy Information Administration
Expectations that the rollout of Covid-19 vaccines would support economic growth have led to forecasts of increased consumption while production cuts among the Organization of the Petroleum Exporting Countries (OPEC) and its partner countries (known as ‘OPEC+’) will lead to a gradual drawdown of stocks. This upward price pressure was further amplified by the 5th January announcement by Saudi Arabia that it would cut crude oil production by an additional 1.0 million barrels a day during February and March.
“Gas oil prices are currently 10ppl lower than at the same time the year before. This saving helped offset costs increases in other areas such as machinery replacement and crop protection,” says Mr Blake.
The outlook for ammonium nitrate (AN) fertiliser prices are less easy to forecast.
“The price AN at the end of 2020 was trading at a £20/t discount to the start of the year. Taken together the savings on fuel and fertiliser amount to a 15-20% change on 2019 and will do much to offset the cost increase seen in other categories. As with fuel, fertiliser prices are expected to rise in 2021 in part due to a bigger area of winter-sown crops in 2020/21 supporting demand, but also because gas prices across Europe are rising sharply. January prices for AN are currently £40/t higher than the same time last year,” says Mr Blake.
Forecasting prices for nitrogen fertiliser can be complex because there is no futures market that would allow observers to gauge demand or for buyers to hedge their price exposure. Instead, analysts often use the price of natural gas as reliable indicator of fertiliser prices as it is the main source of hydrogen which, once processed, is combined with nitrogen to create ammonia. Natural gas prices increased steeply in the third quarter of 2020 before reaching a two-year high in January 2021 as the colder-than-average winter moved the market from the point of balance to deficit.
The price of ammonium nitrate fertiliser bears a closer relationship to that of natural gas than the commodities to which it is applied
Source: AHDB; US Energy Information Administration
In 2020 the national living wage increased by 6.2% because of higher inflation, from April 2021 this will rise by 2.2% which brings the minimum wage for those over 25-years old to £8.91/hour.
“This is likely to be the minimum growers can expect for third-party supplied labour as the pandemic has driven a number of foreign workers home from the UK. As an industry we have yet to see a mechanised alternative to the many of the tasks performed by casual labour,” says Mr Blake.
The national living wage has increased 24% since its introduction in 2016
Rate from April 2020
|Rate from April 2021||Increase|
|National Living Wage (£/hr)||8.72||8.91||2.2%|
|21-22 Year-Old Rate (£/hr)||8.20||8.36||2.0%|
|18-20 Year-Old Rate (£/hr)||6.45||6.56||1.7%|
|16-17 Year-Old Rate (£/hr)||4.55||4.62||1.5%|
|Apprentice Rate (£/hr)||4.15||4.30||3.6%|
|Accommodation Offset (£/hr)||8.20||8.36||2.0%|
Forecasting changes in crop protection costs is far from easy this is in part due to increasing segmentation of products and the varying impact of volume deals that distributors agree with manufacturers. In 2019 Andersons forecast an increase of between 0 and 5%. It has repeated this forecast guidance for 2021.
Like for like, there have been small reductions in some product pricing, but the cost of products containing new active substances are likely to exceed any savings, says Mr Blake.
“The challenge here is in gathering accurate data to inform a reliable forecast. It is further complicated by the loss of products be they seed treatments, desiccants, nematicides or fungicides. In some cases, a lost product can be replaced by an alternative while in others, such as was the case with diquat, it can lead to additional work in the form of flailing. In others such as wireworm control, there is no alternative.
“The impact of these changes may extend beyond crop protection. It is likely that in some situations marketable yields will suffer. This would reduce profitability and erode the competitiveness of the sector,” says Mr Blake.
The price of machinery is one that continues to confound analysts as the changes reported by DEFRA fail to reflect what many growers are experiencing.
“A recent analysis, for example, found that the cost of replacing a self-propelled harvester, had increased more than 30% compared with that five years ago, an average increase of at least 6% per annum. Similarly, the price of tractors has increased remarkably in the past decade. The cost of replacing a nine-year-old tractor had risen more than 100%, equivalent to a cost increase of 11% per annum.”
Faced with rising costs it would be easy to think the way forward for most growers would be to expand and pursue economies of scale, but this is not always the case.
“Big is not always beautiful. Often the most cash generative businesses utilise a high proportion of family labour, with little reliance on rented land, and are often willing to extend the term of ownership of machinery. Where repairs are undertaken in house, this can have the twin benefit of controlling repair costs and reducing the depreciation charge.
“There are other points of difference. Limiting the area to avoid the need for more dedicated management can be a benefit. Growing the crop as part of wider arable rotation (rather than being a dedicated potato grower) also appears to be more profitable overall, but this very much depends on the area grown, and the intended market,” says Mr Blake.
After two consecutive autumns where the weather has made for a difficult lifting campaign, have growers reviewed their commitment to the crop?
“I’ve seen growers looking to increase harvesting capacity in the event of another challenging autumn, but few appear to be planning to cut their crop area,” he says.
Improving production efficiency and business profitability are industry-wide challenges but achieving these while aiming to enhance the environment and understand the broader impacts of food production is often difficult. Andrew Francis, farm manager at the 9,000-hectare Elveden Estate, has been investigating these conundrums.
After more than a decade of generally sustained cost increases together with the uncertainty of the UK’s future trading status post Brexit it is likely the pressure on margins will continue. Director of Andersons Eastern, Nick Blake, provides an outlook for the main cost headings in potato growing and how they add up to the average cost of production.
Caligula, a new fungicide from Bayer containing 125g/L fluopyram and 125g/L prothioconazole in a suspo-emulsion (SE) formulation, has demonstrated a level of protection against early blight (Alternaria spp.) that is set to secure it one of the highest ratings of any product on the Euroblight early blight league table.