According to research conducted with Welsh sheep farmers, costs in the farming industry are rising so sharply they are eclipsing the improved market returns for lamb producers, leaving farmers with nothing to show for their more profitable produce.

Welsh red meat body Hybu Cig Cymru has identified worrying signs of decreasing profits, despite favourable market conditions, which has translated into a 5 per cent increase in the Welsh sheep flock. Figures for the year to March 2011 show that, although though lamb prices rose 10p/kg, the average farm still made a trading loss as increasing costs ate into margins.

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The most significant price rises have been in feed and forage, averaging at 58p/kg LW, though fuel, power and machinery and farm finance were also identified as important contributing costs.

According to Hybu Cig Cymru figures, in 2009-2010, the average lamb producer only just covered costs, trading at 1 per cent profit. However, in spite of the boom lamb is experiencing, for the last period producers only covered 99 per cent of their costs.

Whilst some farmers are still making a clear profit, even those with the best returns saw their margins drop steeply; most profitable businesses were making 26 per cent profit this year, compared to 33 per cent in 2010. Farms which managed to cut costs typically performed better.

John Richards, of HCC stated, “While market returns may on the surface be improving, increases in costs continue to undermine the situation and are a concern for the long term viability of some farms.”

The Welsh flock grew by 400,000 animals this year; it currently stands at 8.62m, of which around half are breeding ewes.