Even some of the best arable farms could struggle to make a profit without subsidies this year, but future prospects are brighter, according to exhibitors at Cereals 2009.

According to Andersons’ hypothetical model farm – Loam Farm – the cost of producing a tonne of wheat will increase from £101/t last year to £121/t this harvest, as last summer’s high fuel and fertiliser prices and expected lower yields hit margins. Consequently, the margin from production (see table) is expected to fall from a profit of £91/ha in 2008 to a loss of £111/ha this year.

“Although this is a hypothetical farm, in reality even some of the best businesses will struggle to make a profit before subsidies in 2009,” the firm’s Richard King said.

Better prospects

But a welcome fall in fertiliser prices for the 2009/10 season and improvement in cereal prices means prospects for 2010 are much better, he said. “It wouldn’t require much of a lift in crop prices to get back to profit without support. If direct support is phased out after 2012 as we expect, combinable crop farmers will either need higher grain prices or have to improve their efficiency to remain profitable.”

Consultants urged farmers to put the experience of last year’s cost spikes behind them and focus on 2009/10 input purchasing and selling policies. “A lot got caught out last year, but you’ve got to put it behind you and look forward,” Andrew Wraith of Savills said. Managing cash flow will be a particular challenge this harvest. “Farmers have spent a lot on the 2009 crop and if yields are down, face potentially less income. Plus some also face big tax bills after the previous two harvests.

“The important thing is to have a new plan and try to take out as much of the risk – of volatile prices, exchange rates, etc- as possible.”

Fortunately for UK farmers, the recession had not affected production as much as other parts of the world, where securing inputs in the absence of cash and credit would have a significant impact on this year’s production – particularly in Russia and Ukraine, Bidwells head of farm management David Cousins said. “Concerns over the size of the 2009 harvest around the world are growing and forward prices strengthening as a result. We believe commodity prices will continue to strengthen in 2009-10. We have started to see a correction in the price of fertiliser, but at the same time we anticipate the oil price will increase over the year ahead,” he added.

  • As Farmers Weekly went to press, spot brent crude oil was approaching $70 a barrel, up almost $10 over the past month.

Cost of borrowing to remain low

Mark-Berrisford-Smith

Interest rates are likely to remain at 0.5% for at least the rest of 2009, but beyond that the outlook is less certain, according to the main banks.

Lloyds TSB forecast rates to stay at 0.5% until the middle/end of 2011, but senior agricultural manager Jon Rose acknowledged much would depend on the rate of economic recovery.

HSBC’s Mark Berrisford-Smith said the UK economy was in a much stronger position than others in the Eurozone and rates were unlikely to start increasing until at least next spring as recovery speeded up. “I think we should then see a steady recovery and by early 2011 I think base rate will be back to 3-4%.”

Exchange rates were somewhat less easy to predict, as much depended on the perception of the UK’s economic recovery on the global stage. The general consensus was that sterling would continue to strengthen against the euro and dollar, although volatility was likely to be greater than previous years and farmers should find ways of minimising their exposure to that risk.

 

 

£/ha

2008

2009

2010

Gross Margin

685

471

598

Overhead costs

366

333

335

Rent and finance

128

139

154

Drawings and tax

100

110

110

Margin from production

91

111

1

Single payment and ELS

255

267

265

Business margin

346

156

264

Note: Loam Farm is a hypothetical 600ha combinable crop (winter wheat, winter osr and spring beans) farm. 240ha owned with the remainder on FBTs.