Case IH tracked tractor pulling a plough©Tim Scrivener

Restoring profitability is in the hands of farm business managers, not the market, warns consultant Andersons.

Falling profit forecasts for its model Loam Farm and many other similar businesses call for alternative approaches to achieve long term profitability, said head of business research Richard King.

“Most of the vast range in business performance in the UK cereals sector is down to quality of management, this has more impact than inherent factors such as soils or climate,” he said.

While better than expected yields will push returns from the 2015 harvest up slightly compared with those predicted pre-harvest, the Loam Farm will make a significant loss from its farming activity in 2015 and 2016 (see table).

The forecasts illustrate arable profit trends on a decent-sized, well-run (but not quite top-third) combinable crop farm.

Loam Farm facts

  • 600ha total – 240ha owned, 360ha on FBTs at average rent of £375/ha (£150/acre)
  • Rotation – milling wheat, oilseed rape, feed wheat and spring beans
  • Working proprietor, one full-time employee, harvest casual, all operations in-house

The farm needs BPS to put it into profit, and support payments are falling. So 2015’s high yields should not allow difficult decisions to be kicked down the road for another year, warned Mr King.

Lower crop prices and a strong sterling are mainly to blame for profits falling since harvest 2013.

Cost reductions have been achieved through lower fuel prices and deferred capital spending but these are not been enough to offset the drop in income on the model farm.

Expansion is often seen as the answer but if this farm took on an extra 200ha of similar land on a similar rotation, the result would be an even bigger loss (see table below).

Costs would rise through a limited amount of “kitting up” for the new acreage, although this would still leave the machinery complement for the farm at the lean end of the scale.

The figures for the expansion budget include renting in an additional 1,000t of grain storage.

Many uneconomic tender rents were still being offered, said Mr King – although the figures in the table assume that the extra 200ha in the 2016 expansion budget could be secured for £445/ha (£180/acre) fixed for three years.

Generally, if rent accounted for more than 30% of output, there was little prospect of adding to profit with extra land, he warned.

However, a shift to more spring cropping and a more discerning policy towards whether patches of poorer land are cropped at all delivers only a slightly higher profit but lower risk – and the chance to deal with some weed and pest issues.

The better performance would result from lower machinery costs (easier establishment of spring crops, sale of a 200hp tractor and lower repairs), lower casual wages and a cut in regular wage bill by sharing the farm’s full-time employee with neighbours at quieter times.

Cropping policy must be more widely questioned on arable units, said Mr King. If parts of fields (or even whole fields) that consistently yield poorly could not be addressed through better drainage, fertility building, weed control or improving soil structure, then the wisdom of cropping them must be questioned.

“A smaller cropped area may require a change in the overhead structure, but a more profitable business is likely to result.”

Combinable crop outlook – more to consider

  • Introduction of regional payment systems in Scotland and Wales will see crop farmers’ support fall further through to 2019, said Andersons.
  • Loam Farm find it difficult to get into the Countryside Stewardship scheme (replacing ELS payments), leading to a further overall support drop in the 2016 cropping budget.
  • Further business risks include a British exit from the EU, with the referendum of massive importance to UK agriculture.
  • Those taking on new land need to factor in that it often does not perform at the same level of efficiency as core land.
  • With a budget based on a return to “normal” yields in 2016, Andersons warns that a recovery in global prices will probably require a drop in production, but also that it would be dangerous to base business plans on such an unpredictable event.

Loam farm margins – harvest years (£/ha)

 

2013 (result)

2014 (result)

2015 (estimated)

2016 (budget)

2016 +500 acres

Future shift to more spring crops

Output

1,204

1,132

1,091

1,034

1,034

923

Variable costs

457

425

431

424

424

348

Gross margin

747

707

660

610

610

575

Overhead costs

404

407

404

398

383

364

Rent and finance

194

218

243

242

300

242

Drawings

73

75

75

77

58

77

Margin from cropping

76

7

(62)

(107)

(131)

(108)

SPS/BPS and ELS

243

226

204

172

172

172

Business margin

319

233

142

65

41

64

Budget for 2016 assumes return to normal yields. Source: Andersons