Rising input costs, static commodity prices and falling aid payments are squeezing arable profits. We asked four key business exhibitors for some timely advice

Strutt & Parker: Yield is still king

Richard-MeansA 10% increase in yield delivers a 30% increase in profit on a typical 600ha combinable crop farm, says Richard Means, associate partner at Strutt & Parker’s Cambridge farming department.

The firm has revised its benchmarking figures for Cereals 2009. These show that yield is still king – but they also highlight the importance of up-to-date targets and the need for attention to detail, he says.

“Harvest reports and historical benchmarking have their uses, but with input and output prices moving so rapidly, growers need access to current figures for similar businesses,” says Mr Means.

“Our top 10 managed farms this year will be spending an average of £540/ha on input costs for a first feed wheat. That’s a frightening figure.

“All the core pesticides have gone up on average 15-16% in the past 12 months. People maybe looking to save costs, either through lower rates or dropping the odd spray, but you have to be extremely careful otherwise you risk not achieving five-year average yields.”

To get into the top 25%, growers need to pay close attention to every aspect of the business, he says. “For example, it’s no good having the best agronomist if you don’t then get the recommendations on at the right time.”

Another good example is maintenance of field drains and ditches. The lack of it on some farms showed up during the wet weather last autumn and winter and it will affect yields, says Mr Means.

Many businesses would also benefit from a thorough review of their machinery and systems to make sure they have the right tools for the job. “A change of drill and cultivation system can sometimes make a huge difference.

“Time spent shopping around can result in significant discounts on new machinery. At the same time you are likely to get a decent price for second-hand kit because the current weakness of sterling means our machinery is in demand for export.”

Anyone changing machinery should give themselves plenty of time to make decisions and strike the right bargain. “I started negotiations in October on a new combine and settled in February, which allowed me the time to achieve a really good deal and significant saving.”

Andersons: Long-term planning is vital

Graham-RedmanMore farmers should have a five to 10-year business plan, says Graham Redman of Andersons, which will focus on business issues and long-term planning at Cereals.

Many growers are concerned about 2009/10 crop prices and planning for the 2010 harvest crop. More should also look longer term, he says.

“You have to distinguish between what is urgent and what is important. Urgent issues may need immediate attention, but more important issues are often left unresolved because there is no obvious deadline to do so.”

The long-term business plan must consider what changes may be needed, even if some of these are tricky from a financial, family or personal perspective. It also needs to look hard at factors which will affect or influence the business. Changes might include structural issues such as new partners, retirement, expansion or long-term investment.

While arable farms are generally well equipped with machinery, they are sometimes short of grain drying, handling and storage, suggests Mr Redman.

In this and other areas they may need to consider future structures and investment in alternative forms, such as joint ventures or group projects and benefit from Rural Development funding.

Long-term cash flow planning should also be clear so that contingencies are in place when an event has an unexpected impact on the business.

“We see the CAP changing substantially following the budget review, whereby all EU funding is being renegotiated for implementation from 2013.

“We see the total amount of money within the CAP falling and the proportions changing in favour of rural development. We expect the single payment to last through to 2020, but its value to be far lower from 2013.

“The market will take on an even greater role as the single payment decreases. Greater exposure to the erratic movements of commodity markets will need to be splanned for too as market support policies diminish.”

More time should also be invested in training on some farms to improve growers’ understanding, interpretation and use of financial information, says Mr Redman.

Grant Thornton: Plan capital investments

Gary-Markham 2Investment in plant and machinery must be planned and timed carefully to achieve the best cash flow and tax outcome, says Gary Markham of Grant Thornton.

Businesses have an Annual Investment Allowance (AIA) which gives them 100% relief on the first £50,000 spent on plant and machinery in an annual trading period. In addition, there is a First Year Allowance (FYA) of 40% on the balance after the initial £50,000. In following years, the allowance rate is 20%.

“It is an important planning point that FYA is available for any length of time the machine has been in the business,” points out Mr Markham. “Even for purchases in the final month of the trading period the £50,000 and the 40% are fully available.”

However, joint ventures and machinery syndicates may be penalised by anti-avoidance rules which do not allow two businesses to each have an AIA if controlled by connected persons within the same tax regime. But this year’s Budget gave a boost to businesses known as mixed partnerships, where a company or a trust is a partner with other persons. These can now use the 40% FYA rate.

Once a capital budget has been drawn up to plan purchases over the next five to eight years, growers need to consider the cash flow and tax implications of finance options – cash, hire purchase and leasing:

  • With HP, the machine must be brought into use before the end of the financial year of the business to be eligible for AIA and FYA. If not, these are only available on the proportion of capital paid before the year end
  • There are two types of lease – operating leases and finance leases
  • An operating lease is a form of contract hire. A rental is paid for hire and usually maintenance with the machine being handed back at the end of the contract
  • HMRC requires finance lease payments to be spread over the useful life of the asset for tax relief purposes irrespective of when they are actually paid. Tax relief at say 20% a year over five years in a lease agreement would be usual. This compares unfavourably with 40% FYA available through HP and cash purchase
  • A finance lease involves payment for the full cost of the asset over the agreement period so most of the risk and reward associated with ownership rests with the farmer. The main problem here is that when the machine is sold, the part exchange value is technically a rebate of rentals which are taxable income
  • With finance leases the asset and associated liability are included on the balance sheet of the business, like a loan to purchase an asset.

Brown & Co: Protect crop investments

Simon-MountjoyThis will be the most expensive wheat crop we’ve ever grown so growers need to take steps to protect their investment, says Simon Mountjoy of Brown & Co.

“20% of our current wheat price is attributable to the devaluation of sterling and if that changes, and it probably will, we could be back at £80/t, with new crop around £100/t.

“The first step is to work out a target price based on cost of production, and that means total cost of production, not just inputs and field operations which is where too many farm costings stop.

“Your target price needs to include a level of profit that allows you to live and reinvest. Growers need to look at the market and see what mechanisms allow them to achieve that.”

Brown & Co has been working with Offre et Demande Agricole (ODA), a French grain market information provider and has used their independent advice on several farms this year. ODA offers a two-day training course and subscription-based information services. The training looks at market fundamentals and at using tools such as futures and options.

“Their record in France is impressive,” says Mr Mountjoy. “A grower who had followed their advice for this harvest would be getting a price well above that currently available.”

As levels of investment and risk increase, growers need to become more than just better cost managers, he says.” Cost control is about being mean but we also need to add up all costs to give an accurate cost of production per tonne, per kg or per litre.

“For too many, this is uncomfortably high relative to market expectations but it is crucial to get this right and make decisions for the future. Profit margins are going to be squeezed as we absorb higher costs (including rents) and uncertainty.

“It is well worth the time and effort to go into harvest with sufficient commitments and options to know that barring a yield disaster, the year will be profitable.”