Two years of wet weather in Scotland have impacted on harvests and coincided with rising input costs, which are increasing challenges faced by farmers in the country. Although the annual Bank of Scotland Agricultural Report, released on Friday (8th February), shows the prosperity of the Scottish agriculture industry slipped in 2012, the survey of 474 farmers revealed a high level of optimism across the sector.

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The survey was carried out in December 2012. It revealed that the proportion of Scottish farmers who believe the industry to be prosperous or very prosperous fell to 11 percent, an 8 percent drop since 2011, suggesting something of a knock in confidence. The decrease in prosperity was reported in all sectors, with hill farmers showing the largest down-turn in opinion, largely because of poor lamb prices seen over the past 12 months.

However, RBS analysts said that, despite a perceived dip in current prosperity confidence in the long term future of Scotland's agriculture sector remained high, with optimism levels at their second-highest since the survey began. 28 percent of farmers said they were optimistic or very optimistic about the industry.

The industry is expecting a period of growth over the next five years, with expansion planned across most sectors. Growing global population and rising demand for food means that, with the exception of lamb, Scottish farmers predict prices for all produce will rise over the next year.

Another area for optimism is growing interest in renewable energy generation as an alternative or supplementary source of income. Amongst the 43 percent of farmers who said they gained income from sources other than farming, Wind power, wood fuel heating and solar power were found to be the most popular renewable options, with 10 percent of respondents already invested in solar and the same amount invested in wood fuel heating options. Some 16 percent of farmers have already invested in wind projects, with 2 percent investing with the local community. The number of farmers investing in renewable energy projects is set to rise over the next few years.

However, property remained the most popular source of supplementary income and, despite Scotland's potential for renewable energy generation (the country has been estimated to have 25 percent of the total EU capacity for wind energy generation), 76 percent of farmers said planning permission was a definite obstacle to setting up renewable energy projects, even when working with the community.  

Investment and income

Despite difficult current conditions, farmers are still maintaining a long-term, strategic view by investing in their enterprises. Investment across Scotland’s farms in 2012 was higher than predicted at the start of the year. 45 percent invested in plant and equipment, after only 28 percent stated last year that they planned to do so.

The survey showed a fall in profitability, particularly for arable, mixed and hill farmers. Nevertheless, 85 percent of Scotland's farmers said they were profitable over the last complete financial year - down 2 percentage points on the previous year. 59 percent of those who answered said they expected their businesses to be profitable in 2013.

Dairy farm incomes were also under pressure. The survey found under half of dairy producers (48 percent) anticipated their business to be profitable, down from 80 percent in 2012. However, plans for dairy expansion were particularly strong, with 32 percent saying they intended to increase their operations. While the industry is seeing the number of dairy farms contract, the number of animals per herd is increasing, indicating a concentration of the industry as fewer, larger units develop.

Donald MacRae, Chief Economist at Bank of Scotland commented on the study's findings, "Last year's weather ensured the recession affecting the most of Scotland’s economy for the last five years finally caught up with farming. Relatively unscathed until then, the agricultural industry is now coping with rising input costs, depressed lamb prices as a result of falling lamb exports to Southern Europe and poor yields of potatoes and cereals.

"Despite the economic climate, agriculture remains an attractive and relatively secure sector for investors thanks to valuable farm assets, positive prices for produce and high levels of support in terms of subsidies.

"Bad weather might be challenging for farmers in growing crops and tending animals but it does reinforce the world’s increasing demand for food. As a result the long term prospects for Scotland’s oldest industry must surely remain bright."