Episode 1: The supply chain

28 Nov

Our panel of arable and fresh produce farmers discuss the impact of supply chain bottlenecks and input price inflation on their business and what it might mean for the coming growing season. Florian Ritzmann speaks with Ali Capper, Chris Hollingsworth and Robert Alston about the impact on their businesses now and what the future might hold for the UK farming industry.

Contributors in this episode

“It feels to me at the moment like this government doesn’t really mind whether the food that goes on British plates is grown here or not. And that is a very worrying place, I think, for an island economy to find itself, especially after the disruption that we’ve seen in our supply chain in the last year or two.”

— Ali Capper

Florian Ritzmann: Hello and welcome to The FutureFarm Podcast.

In this special feature series, we invite farmers to talk about agriculture topics that matter. And no subject is more important right now than what is going on in the supply chain these days – and what the impact of today’s shortages and bottlenecks may have on next year’s growing season.

But before I kick-off, let me introduce the panel.

Today, we have with us Ali Capper, who is and does so many things that I’ll struggle to keep it brief. Ali grows hops and apples on her Herefordshire family farm, she is also a Director of the British Hop Association, Chairman of British Apples & Pears, and Chairman of the National Farmers Unions Horticulture & Potatoes Board. Add to that her record as a scholar and a corporate background in marketing and you get one of the most distinguished spokespeople in British Agriculture.

Also joining us today is Chris Hollingsworth, who farms arable in Suffolk and Hampshire. Chris has converted a portion of his land to regenerative no-till farming, so we’re keen to hear his view on how bottlenecks might be affecting his operations.

And last but not least, we have Robert Alston on the line. Robert farms wheat, barley and peas near Norwich. With a background in the city, Robert is used to weighing up financial risk, so we want his view on the kind of decisions he is facing right now.

And I am Florian Ritzmann, I work for FutureFarm and you may have guessed, I am neither British nor am I a Farmer. I help build digital marketplaces and trading platforms for a living, which is what I do at FutureFarm.

Now, let’s get back to the topic at hand – and to get us going I will read out a portion from a recent newsletter sent to me by a large fertiliser distributor.

“The understanding of what was possible in Urea markets reached an altogether new level of incredulity last week as the outcome of the latest RCF Indian tender hit home, needing to buy 1.5M tonnes of Urea, just over 700K tonnes was able to be secured.” It goes on “Very little product is on offer in the UK, if India can’t source product, the UK will clearly struggle too.”

Robert, let me ask you – Are you finding it difficult to buy fertiliser this year?

Robert Alston: Thanks for that. Yeah, good question, that I think a lot of farmers are wrestling with at the moment and some people are being forced in and out of decisions as we speak. It's a real dilemma in that that we were getting some good commodity prices at the moment. But looking forward and with my financial hat on we will be struggling in the next year. Any additional margin has just been eroded completely by increased fertiliser prices.

To answer your question, though, long and short of it is that at the moment as fas as the liquid nitrogen fertiliser that we use in arable farming, I'm being told - yes we have our committed tonnage, we have sourced product for you - but we just can't tell you how much it's going to cost yet. So you find yourself In this dilemma where as we speak, we have a drill putting seed in the ground. We know the cost of that, we know we're going to have inflation for all costs across seeds, fertiliser, chemical, energy; everything is going up. We're enjoying let's say a commodity price on wheat of 180- 190, potentially now 200 pounds a tonne. Last year, we were working on a, you know, a notional price of 185. So the crop I'm selling at the moment there's a margin at the moment, selling wheat at those prices.

When I was offered liquid nitrogen prices in June, when the first prices come out, I took advantage to fill my tanks up to the maximum and I got an early bird discount, supposedly, I had no idea where the market was going at that point. I had to pay 243 pounds a ton in June, as opposed to 185 last year. So that's quite a substantial increase already and the tanks will need to be filled up another three times at least.

So the dilemma is that it was a decent harvest and we got a good price. But buying fertiliser and probably a lot of other inputs now will eat up that profit.

The fertiliser I bought for 243 back in June, that has at least doubled if not tripled, we're hearing of six 700 pounds a ton plus in the market - if it's available. We've had a better year, there's a bit of a commodity cycle going on at the moment, whet had a 20-30% increase, which is great. But obviously that doesn't cover a three-times increase in fertiliser input. So what I'm trying to get my head around at the moment is: what's the cost-benefit? What margin have I got? Even if I assume a good, let's say 10 tonnes a hectare at 180 or 200 pounds, at the old fertiliser price, the margin there is back to where it was probably years ago, at breakeven or less. And that assumption depends entirely on a good yield and that's in the hands of the weather Gods.

“... it was a decent harvest and we got a good price. But buying fertiliser and probably a lot of other inputs now will eat up that profit.”

— Robert Alston

Florian Ritzmann: Thank you for that we'll get back to what the potential impact of your decision might be on you and on food consumers. But before we do that, let's talk to Chris. Chris, you're into regenerative farming. So I'm just going to posit a very ignorant statement, which is - as a regenerative farmer, you don't need any fertiliser, you should be fine. True or false?

Chris Hollingsworth: Well, that is not strictly true, Florian. Certainly soil health and improving soil health is the key to reducing your fertiliser inputs. The more healthy your soil is, the more nitrogen-fixing soil bacteria you've got and and more and more the soil has the ability to mine the nutrients that are locked up in the soil that are unavailable to the plant directly through the root system and provide those nutrients to the plant. So if we are in the long term looking at reducing the cost of fertiliser inputs, then regenerative farming will do that. But it won't do it all in the first year. It's a long-term solution, but one which will hopefully by improving soil health will give you healthier plants and reduced inputs. And remember, it will also reduce your cost of production because if you don't spend so much time and money cultivating and working your soils, then you've got cost savings there as well.

Florian Ritzmann: But you still need to buy fertiliser. So how have you been doing this year?

Chris Hollingsworth: I'm in the same boat, the same dilemma that Robert. I took advantage early on for some of my fertiliser and in doing so I know that some of my fertiliser, having been bought early, has been bought at the right price but we're still in the same situation as most other farmers in that scenario.

I think a couple of things here are important, fertiliser losses in the soil are quite large; only something like 50 to 60% of the fertiliser that we actually put on lands ends up being used by the plant. So there's a question - the rest of it lands up in the water courses and being lost.

“So if we are in the long term looking at reducing the cost of fertiliser inputs, then regenerative farming will do that.”

— Chris Hollingsworth

Florian Ritzmann: So you're suggesting that farmers might somehow also get away with putting on a little less? Have we been over-fertilising our fields?

Chris Hollingsworth: I think there'll be a lot of work this spring on timing of fertilisers, the using of foliar fertilisers late on, of spoon feeding the crop ,of trying to improve the efficiency of the fertiliser usage, bearing in mind the additional high cost of it, that will really be important.

Robert Alston: I agree with that, Chris. We are already looking at leaf testing which we've never done enough of. When does the plant actually need it? We are going to do smaller, more accurate applications, at the right time.

Chris Hollingsworth: The other thing which will happen is that if the cost of fertiliser is as high as it is, and its availability is questionable, then there'll be less wheat planted in the world. And if there's less wheat planted, then that will hold the price of wheat up, than more wheat is is sown and drilled around the world, which increases supply.

“... if the cost of fertiliser is as high as it is, and its availability is questionable, then there’ll be less wheat planted in the world”

— Chris Hollingsworth

Florian Ritzmann: That's a key point that I think we'll be coming back to in in a few minutes. Before we do, Ali, what is your perspective on fertiliser? And do you have enough of it?

Ali Capper: Same as the others actually. So we use a lot of foliar feeds, we do a lot of space and soil analysis and leaf analysis later on in the season before we do anything. And we have some already bought. But we are facing having to make a decision to buy some now at prices, which are almost three times what they were and then I guess we'll probably take a risk on buying some later on next year. So yeah, we face the same challenges as everybody else.

Florian Ritzmann: So you're in the same boat as everybody else. You're hoping that this madness will somehow end and sanity shall return and fertiliser will become available at economical prices?

Ali Capper: Yeah, I guess when you get volatility like this in a market, one always just needs to sit back and see what's going to happen, clearly. And things could get worse as easily as they could get better. But one would hope that strategically across the world, the policy levers that can be used will be used. Sometimes it takes governments a little while to catch up with what market forces are doing. But one would hope that common sense will prevail when it comes to global food production.

Florian Ritzmann: You're not an arable farmer, like Robert and Chris, are there any other input prices that are worrying you at this particular time, Ali?

Ali Capper: There seem to be problems everywhere Florian. 40% of our turnover is labour cost. And wages are inflating beyond all recognition at the moment due to the shortages, and not just of seasonal labor. We now have the highest vacancy rate in the UK since records began. And we have some of the lowest unemployment levels across the country, especially in our rural areas. And we are seeing, whether you talk about haulage or logistics, or you’re talking about pack-house labour or on-farm labour, it's all inflating and clearly it is starting to give the Bank of England some cause for concern now, at last. Quite where that's going to fall I'm not sure.

We are growing apples. And obviously our prices depend on a packed product and everything's inflating, Cardboard is inflated by about 40%. In the last six months, packaging has gone up by two lots of 10%. And then there are capital infrastructure projects, because of course, when we're looking for productivity gain, it often comes with some sort of capital infrastructure investment in order to get better automation into a system. And of course, all construction costs have inflated, I mean, even things like building installations are going up by 100%. And often when these costs go up, they don't come back down. So I'm certainly sure we won't be alone. We are. putting some capital infrastructure capex projects on hold at the moment, trying to just wait for things to come back a bit. But yes, everywhere I look at the moment there seems to be significant double-digit inflation

“... everywhere I look at the moment there seems to be significant double-digit inflation”

— Ali Capper

Florian Ritzmann: And the kind of inflation that a year ago you you simply wouldn't have expected. This is out of the blue?

Ali Capper: If I go back just six months, Florian, my sector was very, very concerned that over a five year period, we'd seen 34% growth in wages compared to the previous five years when it had been about 10%. And right now, the haulage industry is seeing a 50% increase in wages in just six months. And some of this is just, well, it's very, very volatile. And should we have seen it coming? There was always going to be a Brexit effect. But of course, what we've got layered on top of that now is a COVID economic recovery effect. And then you've got, I would say, some some interesting UK policy challenges around what the government is trying to do with its high-wage, high-skilled economy. So you've got sort of different layers of problems that are creating, creating what we're now seeing in terms of unprecedented inflation.

Florian Ritzmann: Okay. And all on the shoulders of farmers, from the sounds of it, who we depend on quite a lot to feed us. So taking just a small step back and back to talking about fertiliser. So there is a correlation between fertiliser and the quantity of wheat grown, I think we've established that. But what about the quality, and again, me asking as a non farmer, if you put less fertiliser out there, do you get a lower grade wheat as a result?

Robert Alston: Two parts to that. Yes, yes, of course you do. The protein content of the grain, and the starch through that will flow from the nitrogen. And therefore those growing milling wheat… - wheat has multiple uses from animal feed through to different grades used for bread and ingredients, etc. And different parts of the country due to weather and land type will specialise in growing different types of wheat for certain markets. And therefore they want nitrogen to get that protein level in the grain. Myself sitting over here in the far east in East Anglia near the coast, we grow barnfillers, we grow feed wheat for animal feed. So I don't necessarily need a high protein grade wheat, but I need weight in it. But the issue is not just the quality of the grain, but getting the actual yield itself. And if you looked at saying, okay, let's not put nitrogen in at all, let's just rely on you know, no artificial fertiliser, my yield will definitely half, potentially be a third of what it is now. And that significantly loss-making.

“... if you looked at saying, okay, let’s not put nitrogen in at all, let’s just rely on you know, no artificial fertiliser, my yield will definitely half, potentially be a third of what it is now.”

— Robert Alston

Florian Ritzmann: And so going back to Chris's earlier point, what is the effect of less wheat being grown on consumer prices? And please state the obvious, but I mean, are we looking at a price explosion for for food products that we're not talking about enough right now? Is that potentially a risk?

Chris Hollingsworth: Yeah. I think it is. Going back to Roberts viewpoint there about the fact thay he grows feed wheat rather than the milling wheat. The reason he does that is because the premium we get in the UK for growing milling wheat is not worth the risks attached to growing the milling wheat because as the farmer, you take the risk as to whether you can achieve the standards that the mill, the bread-making mill, requires. And if you can't, then it gets downgraded to feed. So you'll have spent all that money without getting the return. If the premium is big enough, then it's worth taking the risk.

So yes, against that, of course, we have imports. The mills can always import wheat from abroad and bring that in, albeit that doesn't always have the same crop assurance standards and care, that we take about growing and which we need, to cover our farm assurance schemes, to make certain that what we're producing is healthy for the consumer. So that's one of the big questions, really, why we aren’t growing milling wheats in this country instead of feed wheats. As far as the consumer is concerned, yes, definitely. I mean, Ali' has already mentioned the fresh produce world, which is where over 50% of the cost of production is labour. And if the labour rates is going up and up, then they are going to need more money in order to grow those crops.

Florian Ritzmann: And Ali, you are obviously very well connected all over, including government. I feel like we're talking a lot about saving Christmas, that seems to be the slogan right now, saving Christmas, making sure we've got our turkeys but what about next Christmas? Is the government in any way, as far as you know, thinking about the effects and how to mitigate the effects of increases in food prices?

Ali Capper: I think in all honesty, I think Christmas is a bit of a distraction. And I hope the government's recruitment of Dave Lewis, ex Chief Exec of Tesco, to save Christmas will go beyond it and into next year, because I think this reacting to the immediate problem, which seems to have become the way in which the government is approaching things, it's just not good enough. The shortage of labour in many of the business sectors now means that people are starting to take different, very different decisions about the long term. I know growers who are going to mothball glasshouses that should be growing tomatoes and cucumbers and peppers next year, I know growers who are not going to plant the crop that will need to be picked next year because they can't take the risk of not getting the labour. I know of a business that has put 300 tonnes of daffodil bulbs into landfill because they have no confidence that the labour will be there to pick it in January and February. So is it just a Christmas problem? No, it's not. And it's not simply about labour either. Although I think in our sector, that's the the main driving force. But I think these inflationary pressures, which seem to be exacerbated in the UK, if, which I’m sure you’ll make us switch to in a minute, Florian, switch to the energy costs that are inflating, again, in a very volatile fashion, and they are doing so across Europe, but it's worse here. Labour is short across Europe, but it's worse here. So we seem to have an exemplary position when it comes to all of these problems, which means we need some serious long term strategic thinking to fix some of these issues, as well as the short term reaction. So is it about this Christmas or next Christmas or Christmas 2023? It's about all three of them.

“I know growers who are not going to plant the crop that will need to be picked next year because they can’t take the risk of not getting the labour”

— Ali Capper

Florian Ritzmann: I don't want to be alarmist but are we surfacing a structural problem here and not something that could be solved short term? So in other words, how confident are you that fertiliser prices in March or April will be back at an affordable level? I guess I should ask you, Ali

Ali Capper: What's driving fertiliser cost, especially in the UK, is energy costs. And those are higher across Europe. It will take a major structural change in energy supply, to bring energy costs down and adjust downwards the fertiliser cost. There was some talk that Russia may be using this to get Europe to sign a deal. And the new pipeline does sound like that would fix it. It's way above my paygrade this stuff, Florian. But it seems to me that we need a big structural change in energy supply, and therefore reduction in cost to change the fertiliser cost. And that means that governments are going to have to work together to deliver that.

Florian Ritzmann: You say, above my paygrade. And for me, that's perhaps one of the conclusions of this call. It seems like this problem is a bit above anyone's paygrade in that there are so many moving parts to this issue. We just touched on fertiliser to kind of expose it. But there are clearly other things, there are energy prices, labour costs we spoke about and it does feel that we're simply at the beginning of a process that will require some kind of concerted effort. And I hate to say it: by government. Because right now to me, as a non-farmer, it feels like a lot of these problems are being laid at your doorstep. It sounds like we're asking you farmers to help us with food security, but we're not really giving you the tools - by which I mean affordable inputs - with which you could achieve that.

So therefore, let's say all our efforts at targeting the fertiliser and making it last as long as we can, don't work out or they're not as effective as hoped. The impact on grain, on wheat prices - if less is produced, prices should go up. So therefore, isn't there somewhat of perverse incentive on farmers to almost say: You know what? The risk on us as farmers as business men or business women is not as great as it is on the consumer, because if we don't grow as much, we'll still get more for it. Those are the laws of the market. Now, I'm saying it in a way that is deliberately somewhat controversial. But is that a consideration going through your head, Robert?

Robert Alston: I think certainly I have to go looking at my own business, my own farm, I have to look at the risk-reward for growing the crop. And you know, as a farmer, you're locked into a long term investment cycle. With farming, it is a significantly long-term business, the machines are on a seven, eight year cycle, my cropping rotation is the same, you can't make quick decisions and change direction that quickly, unfortunately.

So when it comes to looking at what the impact of all that is, I find myself a little bit caught because I've got cost inflation coming through by a significant amount, I've got little place to turn to on rotation. And also for the long term cycle, I'm being asked to take all the production risk, all the operational risk in the field, plus the weather risk and all the things outside of my control, to get a crop to a marketable state, and then sell that at a level that will cover a huge cost, inflation increases. At the moment, the commodity cycle is there to support it, but only just and it's got to continue to stay up to really keep this going. In the long run that isn't sustainable. So something has to give here, farmers will vote with their feet to a certain extent, and have to change the business. But it's such a long term cycle that isn't always possible.

So you really wrestle with this dilemma, and it's one of the worst dilemmas that my 20 year farming career that I've seen at the moment as to how we make this pay, how we make it work. Not just in keeping the business going, but also with the operational, the environmental sustainability concerns that we all want to address along with that.

Florian Ritzmann: Chris, what's your view on this - growing a little bit less, leading to higher prices? We could deal with that?

Chris Hollingsworth: I think Robert explained it rather well, when he's he said all the farmers while they're driving up and down their fields, are looking at the risk-reward, which has got to be right in agriculture in order to get long term investment to provide a secure source of food for the UK, and everything else that goes with it. And, you know, as we look, just down the road, we've got farm area payments reducing and eventually stopping completely.

And the risk-reward figures keep changing.

So it's going to be a very, very difficult time. I mean, there's very little we can do about commodity prices, they are a worldwide issue, There's very little we can do about these fertiliser prices Ali and Robert had mentioned and the energy costs. So I suppose the only place we can really look is to lower our cost of production. And that is something which which which we feel we're doing through regenerative farming by cutting production costs to try and keep the risk-reward ratio right for our business.

Florian Ritzmann: That makes sense.

Ali, I think there's an open goal here for you. We're talking about the long-termism that you need in agriculture. And I think we've already contrasted that with a somewhat short-term approach, which I think is best encapsulated in the fact that when CF, the big manufacturer of fertiliser, shut down its operations in two plants in England in September, the government stepped in, in order to subsidise the production of essentially a by-product, but not the production of fertiliser. So that I think, for me, is the definition of short-termism.

So is there a mismatch here between the long term needs of you know, risk-reward and agriculture? We're talking about growing organic matter that cannot be done on a short-term basis. It’s just not something that can be done unless you're thinking long term. Is there a real mismatch here between what our government is doing and what farmers need?

Ali Capper: Yes, I think there is a mismatch but I think the mismatch is also between farmers and their market.

So sitting here as the orchardist, who takes takes two years to audit trees, it takes five to six years to get them into full production and your life cycle therefore from initial concept of selecting the variety I want to grow, to being ready to take that variety out and plant the next one is anywhere between 15 and 20 years. So it's very long-term, what we do.

Businesses are serving their retailer directly or through a packhouse. And then negotiations with retail continue to be caught up in what can only be described as an ongoing price war between the traditional retailers and the discounters.

Many growers will tell you that price negotiations this year started with the word deflation, what retailers wanted was deflation in their prices. And that's a very untenable place to find yourself when you're facing double digit inflation in everything in your business. So we've got the price war in the market, which is making it very difficult to pass on prices to retail, what retail then choose to do with that, in terms of increasing prices to the consumer or not, is really up to them.

But when we have retailers announcing 40% increases in their profits year on year, it feels like there may be a little bit more room for their margin to protect the consumer.

And then you have a government, which is taking a very - actually - I think - quite a challenging approach to business at the moment. It almost feels like the government is playing chicken with the business sector because the government is saying: No, we're not going to change, we're not going to introduce any policy measures to help you deal with your energy costs, deal with your increased fertiliser prices deal with your wage inflation, the market will sort it out.

The problem is, and again, I speak now as an apple grower, is if all of these things are being exacerbated in the UK, which will make me the most expensive -make the UK the most expensive place to grow apples in the world - my market will sort that out. And actually my market will choose to import instead, because it's cheaper. And that way they can keep food prices lower.

So when I say the government's playing chicken with business, it feels to me at the moment like this government doesn't really mind whether the food that goes on British plates is grown here or not. And that is a very worrying place, I think, for an island economy to find itself, especially after the disruption that we've seen in our supply chain in the last year or two to move to a position where we import even more, and where borders and border controls and logistics become even more important. And we've seen that fragility in the last couple of years.

I think that's quite a dangerous place to take the UK. Because we know from other economies in the last couple of decades, any nation only needs three days of empty shelves before you get civil disobedience.

Florian Ritzmann: Okay, on that happy note…that's certainly been a lot of food for thought for me, no pun intended. I think we've covered a really wide range of topics. And I think one thing is clear, which is that the future is not as certain as we'd like it to be. And well, by the next time we speak, hopefully some of these issues that we've touched on would have moved in one or the other way, to perhaps discuss a little further.

But I'd like to thank you all for your time. It certainly have been fascinating to me to hear your different opinions - the farmers view really - on all of this because I do feel that in this whole discussion on price inflation, we focus a little bit too much on how long it's taking for me to queue to fill up my car, as opposed to what's actually going on beneath the surface here.

So thank you very much once again, for all your time. It's been fantastic. And I hope to speak to you again soon.