The TRUTH About How Farms Turn a Profit
According to the Department for Environment, Food and Rural Affairs (Defra), there were about 212,000 farm businesses in the UK in 2020, employing 476,000 people. The total income from farming in the UK was £4.2 billion in 2020, a decrease of 21% from 2019.
Output is the value of the products that farmers sell, such as crops, livestock, milk, eggs, wool, etc. The output value depends on the quantity and quality of the products, as well as the market prices. Market prices are determined by supply and demand, which can vary depending on the season, weather, consumer preferences, global trade, etc.
Subsidies are payments that farmers receive from the government or other organisations to support their activities. Subsidies can be based on various criteria, such as land area, environmental performance, animal welfare, etc. Subsidies can help farmers cover their costs of production and reduce their risks.
Diversification is when farmers engage in other activities that generate income besides farming, such as tourism, renewable energy, education, etc. Diversification can help farmers increase their income sources and reduce their dependence on farming.
So far so good. But what are the challenges that farmers face in making a profit? Well, one of the biggest challenges is the supermarket price wars. Supermarkets are the main buyers of farm products in the UK, accounting for about 80% of food retail sales. Supermarkets compete with each other to offer low prices to consumers, which means they often squeeze the margins of their suppliers: the farmers.
Supermarkets can use various tactics to pressure farmers to lower their prices or accept unfavourable terms. For example, they can switch suppliers at short notice, impose fees or penalties for late deliveries or quality issues, demand exclusive contracts or volume discounts, or use promotional offers that reduce the value of farm products.
These practices can have serious consequences for farmers. They can erode their profits and cash flow, force them to cut costs or invest less in their farms, or even drive them out of business. According to a survey by the National Farmers Union (NFU), 58% of farmers said they had experienced unfair trading practices by supermarkets in 2019.
Some examples of how supermarket price wars affect different types of farms are:
• Dairy farms: Dairy farmers have been struggling with low milk prices for years. The average farmgate price for milk in 2020 was 28.6 pence per litre, while the average cost of production was 30.5 pence per litre. This means many dairy farmers were making a loss on every litre of milk they sold. Supermarkets often use milk as a loss leader to attract customers, selling it below cost or offering two-for-one deals.
• Fruit farms: Fruit farmers have to deal with high production costs and variable weather conditions that affect their yields and quality. Supermarkets often demand uniform standards and specifications for fruit size, shape and colour, which means a lot of fruit is wasted or rejected. Supermarkets also use fruit as a promotional tool to compete with each other, offering discounts or multi-buy offers that reduce the value of fruit.
• Banana farms: Bananas are one of the most popular fruits in the UK, but most of them are imported from Latin America. Banana growers there face rising costs of inputs such as fertiliser, cardboard and plastic. However, supermarkets have not increased the prices they pay for bananas for more than two decades. This means banana growers are trapped in poverty and unable to invest in improving their farms or living conditions.
So what can be done to help farmers make a fair profit and survive the supermarket price wars? Well, there are some initiatives and solutions that aim to address this issue:
• The Groceries Code Adjudicator (GCA) is an independent body that oversees the relationship between supermarkets and their direct suppliers. The GCA enforces the Groceries Supply Code of Practice (GSCOP), which sets out rules for fair trading practices by supermarkets. The GCA can investigate complaints, impose fines, and name and shame supermarkets that breach the code.
• The Fairtrade Foundation is a charity that promotes fair trade for farmers and workers in developing countries. Fairtrade products, such as bananas, coffee, chocolate, etc., have a minimum price that covers the cost of sustainable production and a premium that goes to the producers for social and environmental projects. Fairtrade products are certified and labelled to help consumers identify them and support them.
• The Farming Investment Fund is a new scheme that will support innovation and productivity in the UK farming sector. The scheme will offer grants for equipment, technology and infrastructure that can help farmers improve their efficiency, quality and sustainability. The scheme will open for applications in 2022 and will be funded by the money released from reducing direct payments to farmers.