The arable financial rollercoaster is picking up speed and it is crucial that growers spend time on cash-flow forecasts to avoid a crisis early next year, says Gary Markham, agricultural partner in accountant Grant Thornton.
“I don’t think I’ve ever seen a more financially dangerous time than we have now,” he says. “People really need to sit down with their calculator or spreadsheet and work this through properly. It can no longer be done in your head while you’re sitting on a tractor.
“Viability is made up of profitability, feasibility and return on capital. For some businesses, even though they will be profitable, it may not be feasible for them to get from June 2008 to December 2009. It’s that serious,” says Mr Markham.
Several factors have contributed to the “cash crunch” facing farms, made worse by the steep rises in fuel and fertiliser costs. Projections from the eastern counties AtlasFram Group put variable costs for the top 25% of arable farmers at £497/ha (£201/acre) for the 2009 wheat crop, up by 88% since 2006 and a 68% rise on last year.
These variable cost increases coupled with fuel price rises will mean that a 283ha (700-acre) farm growing 55% wheat will have to find an extra £34,650 to fund its wheat crop next year, before adding any fixed cost increases.
Shorter trade credit
Growers will have to start funding these inputs before they have sold much of their 2008 harvest and on shorter trade credit than usual, as merchants tighten up their terms.
The figures in the table (right) do not take account of cutbacks in fertiliser use that will probably happen in 2009, particularly in phosphate on some soils and some nitrogen, although Mr Markham says that the best policy is still to farm for yield.
On top of the cost increases, the heady arable commodity prices of last year will give rise to big tax bills in January and July 2009, he warns. Many who may look to extend overdraft facilities to meet these tax bills will find that it’s a lot more complicated than making a phone call to arrange extra facilities, says Mr Markham. “Banks will want to see some robust figures.”
“In addition, some tenants have already agreed rent rises this spring of £10-£20/acre, which will be really bad news for them for the next three years. It is difficult to track, quantify and assess the fast-moving prices and costs of the arable business but for those with Michaelmas rent reviews who haven’t agreed rents, it’s not too late and they should use properly constructed budgets and cash-flows to build their case.”
Although the rapid rise in arable commodity prices of 2007 produced a big jump in gross margins and net farm income, this was from a very low base in 2006 (see table). The predictions for 2009 show that while many will still be profitable, net farm income will fall by 35% compared with 2008.
“Recent harvests have not been sufficient to maintain most arable businesses in a viable position with many farmers delaying machinery purchases and living off their depreciation.
“The £134/acre net farm income shown in the table for the 2006 harvest is not sustainable to fund farmers’ drawings, tax payments, capital repayments on loans and reinvestment, and this is the position for top 25% producers.
“If you take the 2007 harvest net farm income of £230/acre as a benchmark instead, then the prediction for 2009 is a 23% cut in profit.”
The figures in the table are for wheat, which represents 55% of the acreage of top 25% growers in Grant Thornton’s survey. Changes to combinable crop margins across the board average out at the same rate as those for wheat, so the implications of cost increases and cash-flow squeezes are the same across all combinable crops, says Mr Markham.
Those who have already restructured to share labour and machinery are in a better position to withstand the squeeze.
“Syndicates have driven down labour and machinery costs to an average of £98/acre for the 2007 harvest, compared with an average of £113/acre for the top 25% in 2007.”
These restructured businesses are well placed to capitalise on arable price increases but even they will have to keep a very close eye on cash-flow.
Farmers will also be able to take advance payments on grain from co-ops and some merchants, but these need to be well planned, warns Mr Markham, because if you get a cash crunch after having done this, your options will be very limited.
Those with financial year-ends between January and March have another option, which is to extend their year-end to the end of April, which will delay their tax bill from the 2007 harvest until 2010.
Suppliers and buyers are also experiencing credit and cash-flow squeezes. This makes it important to find out more about the stability of those you are trading with and in the case of your buyers, what credit insurance they hold, says Mr Markham.