‘The future of agriculture can be bright even in a 'VUCA' world’

Whether they are contending with the weather, market dynamics, or shifting political or economic situations, being a farmer is synonymous with risk taking and the sector is characterised by volatility, uncertainty, complexity and ambiguity – VUCA for short.
Last year brought that to life. It was a volatile year defined by dramatic inflation in farm-input prices as a result of the war in Ukraine and Covid-19-related supply chain uncertainty. This demonstrated just how interconnected global supply chains really are and the impact external events can have on Irish farmers. The war in Ukraine created uncertainty in global agri-commodity markets as both political intervention and physical challenges drove grain prices soaring.
The FAO Food Price Index, which tracks international prices of globally traded agri-food commodities, rose to the highest level since records began and to levels almost 50 per cent higher than 2020. This translated to record farm gate prices and, coupled with good yields, Irish farmers saw output levels rise by €2.5bn.

Inflation costing farmers 

Unfortunately, farmers were unable to hold onto the full rise in output values as the price of key inputs rose, with fertiliser prices trebling along with surging feed and energy prices. 

Overall, this inflation in inputs, cost farmers an extra €1.5bn in 2022. Thankfully the higher prices of farm output cushioned the impact and farm profits for the sector, as a whole, increased by €1bn in 2022.
So, farmers have come into 2023 in a strong position. As a result of the strong profits and cashflow, lending to sector has fallen to the lowest level in more than 10 years – a continuation of the trend seen in recent years. 

Farmers have continued to de-leverage, paying down debt at a faster rate than taking on new debt, where total borrowings on Irish farms now stands at below €2.8bn, about €2bn lower than peaks seen circa 15 years ago. It could be said that Irish farmers have never been as well placed to deal with what a VUCA world may throw up. Against a backdrop of high inflation, slower global economic growth, high and rising interest rates and monetary policy tightening, 2023 looks like the economic environment will continue to be volatile, uncertain and complex. For farmers, higher input costs look somewhat baked into farms in the short term, at least – and likely to remain high for 2023. The evolution of the war in Ukraine, and the weather will be key determinants as to price levels across key inputs such as fertiliser and feed in 2023. Inflation across the wider economy will also put pressure on other key agri-inputs used on farms. 

The outlook for agri-commodities appears calmer than it was 12 months ago with overall farm gate prices expected to decline in 2023 – but still remain above pre-pandemic levels. While margins are expected to tighten in the short term, the long-term outlook for the sector remains positive but price and margin volatility are firmly back on the table. 

Farming must change

In this VUCA world, farming faces a new challenge: one where it is being asked (and legally obliged) to reduce its impact on the environment by lowering its greenhouse gas emissions, lessen its impact on water quality, and enhance biodiversity and nature. So, the challenge facing the sector, globally, is complex. How do we produce more food for more people while not only using fewer resources but also reversing the damage of the past? The simple answer is that the way we farmed in the past will not be how we farm in the future. There is no doubt, but we are entering the beginning of a new era in agriculture, one that will require dramatic change.
Thankfully, in this country, there is a roadmap towards achieving our climate targets that clearly sets out the practices that need to change on farms. Operating in this VUCA world, farmers have demonstrated time and time again their resilience and ability to adapt. What is less clear is future policy direction particularly around stocking rates and the fate of the national herd. This adds a further layer of complexity to farmers taking decisions today to ensure their farms are viable and sustainable into the future. If the sector is to meet its Food Wise 2030 ambitions, along with achieving its environmental targets, policy clarity, access to finance, a supportive eco-system, and innovation will be essential. 

Banks are changing, too

Banks have a unique role in helping to bridge the gap between finance and sustainability to enable the sector to transition to a lower environmental footprint. The financial sector recognises the significant challenge and opportunity that exists for Irish farmers. It can support farmers to embrace these changes in the knowledge that much of what is being asked of them will, in the first instance, enhance the environmental sustainability of the farm but can also contribute to improving overall farm profitability. It also recognises that there will be significant opportunities for farmers as times change – income diversification from activities such as renewable energy generation, carbon farming, and afforestation.
Banks are also setting their portfolios and lending practices on a pathway aligned with the Paris Agreement and committing to targets. This will see banks classifying lending on its green credentials and how they view future lending decisions.
On a practical level, while the financial performance of the farm will remain critical to the lending decision, other aspects of sustainability such as health and wellbeing, and the environment are going to become much more important. For example, at Bank of Ireland we have started to consider and incorporate environmental key performance indicators of farms such as stocking rates, and slurry-storage capacity into our lending process.
Right now, the sector is at the start of this journey. It is not going to be easy for any sector of the economy to transition and farming will be no different. It will mean farming in a different way. In some instances, it will mean increased costs, in others it will mean additional investment. But if the sector works together to enable transition, the future of agriculture in Ireland can be brigh, even in a VUCA world.