David's Digest

I was once called a “boring old fart” by a lady who disagreed with something I’d said. Fortunately, she reviewed her judgement later when it became clear I was right (I would say that wouldn’t I?) and we’ve been good friends since. But I’m in danger of attracting similar comments as I repeat unpopular opinions.

It’s mainly the warning that while arable farming seems set for at least one good year and maybe two, there’s a real chance that profits could decline sharply after that. My reason for returning to the subject is that I recently sat in on a discussion which attempted to define what might happen to costs over the next few years. I’ve also been reading a special edition of HSBC’s Taking the Pulse publication that seems to confirm my thoughts.

The discussion on costs included individuals who buy inputs for a large number of farms and several thousand acres. They research the market on a daily basis and are in close touch with likely trends.

The consensus was that whereas 35% N fertiliser had been bought for use this year at around £145/t, by 2010 it could well cost £245/t. Crop protection products (for combinable crops), which would this year cost about £175/ha would probably be at least £200/ha in two years time.

Wages would certainly increase by the equivalent of or more than inflation and even with min till cultivations being adopted more widely it was likely the cost of labour would rise by up to £15/ha during the two years. Machinery and fuel were more difficult to assess but the odds are they will go up by at least a similar percentage as labour and possibly a great deal more.

And then there’s rent, or rental equivalent if it refers to contract farming. Land agents, on behalf of landowners (and themselves, of course) have been scattering demands for rent reviews around like confetti in eager anticipation of substantial rises on the back of higher commodity prices. But like some farmers they have omitted to include those higher costs in their calculations.

According to the pundits in the group I was with, even if the grain market stays as strong as it is now, yields will need to increase by around 15% to maintain viable margins. Furthermore, this will have to be achieved with fewer inputs of ferts and sprays because they will be too expensive. The next target, they said, should be profitability without subsidies when Single Farm Payments disappear in 2012 – according to current information.

And as the HSBC economist said, there’s one other joker in the pack. During recent stock market volatility the managers of hedge funds have been desperate to find homes for the pension and other cash that comes to them for investment every day. They’ve put some of it into commodities and caused some of the unprecedented daily lurches in futures prices. If stock markets regain stability this ephemeral investment might stop and prices could fall.

David Richardson - column from 22 Feb issue of Farmers Weekly