Earlier in the year there were signs of increased confidence in the agricultural industry. Cereal and milk prices were on the rise and livestock exports were moving ahead.

That situation changed with the outbreaks of foot and mouth disease in August. As well as dealing with rising feed costs, livestock farmers faced movement restrictions which had a severe impact on autumn sales.

The whole livestock sector was affected, but perhaps the greatest legacy has been seen in the sheep sector. As a result of a difficult spring for lamb finishers, some pressure on autumn store prices was anticipated. However, this was compounded by the impact of FMD, the consequent movement restrictions and the closure of export markets.

Finished lamb prices have been down 20-25% compared to last year. If that continues, the cost to the sector over a full year could be of the order of £30 million in terms of lost income. This has been reflected in rising borrowing levels within the sheep sector.

In the cattle and pig sectors prices are relatively stable, however, high feed costs are eroding margins. The dairy sector is affected by similar cost increases, but it has benefited from significant rises in milk prices which should outweigh the additional costs.

Although 2007 was a difficult growing year for the arable sector, affecting both yield and quality, this was outweighed by the increase in market prices. Cereal prices have settled back from their peak, but they remain well above last year's levels.

The trend in machinery sales suggests reinvestment in the sector is taking place at an increased rate. Tractor sales, for example, are up 15% year on year.

Current levels of borrowing are also up 4% on last year. However, we would expect to see a decline in borrowing early this year when the full impact of crops sales, single farm payments and other support measures feed into current accounts.

The year ahead In the arable sector, the futures markets suggest that prices will fall back from this year's peak, to around £130 per tonne. This is still well ahead of recent years, despite the increase in production which is anticipated, as a result of land being taken out of setaside. It remains important for arable farmers to protect their margins by controlling costs and managing risks.

In the dairy sector, forecasts for world prices also remain firm. As a result, profitability should continue to improve, despite rising costs. This will be welcomed in a sector which has endured a prolonged period of financial pressure.

In the other livestock sectors, increased costs are likely to put further pressure on profits- if market prices do not improve. This could drive further structural changes, particularly in the uplands, if breeding stock numbers continue to decline.

Against this background, the introduction of nitrate controls in the nitrate vulnerable zones, will create an additional financial burden.

As we progressed through 2007, a clear division developed between the fortunes of the livestock sector and those of the arable sector. This is not a new phenomenon, but it is sometime since we have seen such a marked divide and it seems likely that this will continue into 2008.

2008 will bring its own challenges, particularly for the livestock sector. However, we should not lose sight of how quickly things can change - 2007 certainly demonstrated that. The future will be challenging but we should be encouraged by the increasing demands we are beginning to see for the products derived from agriculture.

- By Martin Doyle, NatWest and RBS Director of Agriculture, Wales and Borders