Pile of sterling notes(c) Rex

Farmers cannot rely on external factors to improve profitability and many need to need to reassess their business models, says consultant Andersons.

However, there are options for many businesses to change and improve, according to Richard King, the firm’s head of business research. “It is equally important not to get too despondent in a downswing as it is to not get too carried away in the upsurge.

“There are alternatives out there, particularly as markets have moved, times become tougher and support is going to drop. It is when things become a bit harder that people do need to make a change. If you are struggling with the current climate, all is not lost.

“It is not one thing that sets the top 10% farms apart. It is a question of finding a structure and system that suits the farm and its proprietors, and then operating this with timeliness and attention to detail.”
Richard King, Andersons

“You can do this differently. And you can do it better. If the profitability is not looking brilliant, do not just carry on doing it the same way, but harder and more exhaustingly.”

The difference between the best and average businesses in UK agriculture was almost wholly down to management, he said.

“It is not one thing that sets the top 10% farms apart. It is a question of finding a structure and system that suits the farm and its proprietors, and then operating this with timeliness and attention to detail.”

With profitability prospects in most sectors looking worse than for several years, the firm highlighted issues that needed addressing:

  • Farms drifting into high-cost production systems
  • Extra land being taken on at very high rents, often with very little economic logic
  • Considerable investment in machinery and equipment, sometimes driven more by desire to avoid tax than by fundamental requirements of the business
  • Higher milk prices in the past had led a drive to expand output and produce “marginal litres” that were often the most expensive and could have knock-on effects in areas such as cow fertility and overheads.

Andersons suggested that the UK cereals model, largely a high-cost system based on moving large volumes of soil in a small period during autumn, needed reviewing (see Loam Farm costings below).

The introduction of the Basic Payment Scheme (BPS) meant most farms in England should plan for a drop in support of about 20% by 2019 compared with 2013 levels, with some in Scotland and Wales facing far greater cuts.

Full appraisals were needed before taking on more land or making changes, it added. However, capital spending, as long as it improved efficiency and profitability, was worthwhile at any point. With any plan that promised to reduce fixed costs it was important to be rigorous in ensuring these were achieved.

More co-operation and collaboration offered great opportunities for the industry to reduce costs, it said. Joint ventures also had far wider applications than this, being a powerful tool for restructuring, allowing progressive businesses to grow while also offering a way for others to reduce their day-to-day involvement.

The introduction of new Rural Development Programmes across Great Britain would also provide opportunities.

While not the solution for a big proportion, the opportunity to earn a rent of £200/acre should be considered, said Mr King.


Overhaul could turn loss into profit for mixed farm

Meadow Farm, Andersons’ notional mixed beef, sheep and arable business, could turn a loss into a profit with a thorough overhaul.

If business carried on as usual on the 154ha Midlands holding, the farm would lose £13/ha in 2015-16, even including support payments. But simplifying the business structure could cut overheads by 25% and return a surplus of £195/ha.

The main changes in the restructure were:

The dairy bull beef enterprise, finishing 35 animals a year, would cease because it does not have the scale to turn a profit

The sheep flock would grow from 500 to 700 ewes, as revenues could be boosted without much extra cost

The arable business, which grew wheat and barley mainly for livestock feed, would all be contracted out, freeing up labour and cutting machinery costs.

Andersons head of business research Richard King said the small size of the different enterprises made them more expensive to run.

“It is quite difficult to be efficient at those scales and many farmers are a bit like that,” he said. “They have drifted into it over the years. What do you do best? What do you enjoy most? Focus on that.”

Mr King said contracting out the arable work had a double effect, letting the business sell some of the machinery and allowing a family member to bring in money.

“A labour unit is now spare if they want to do some contracting in the neighbourhood or a diversification,” Mr King said. “There is an income option that was not there before.

“Walk round the machinery store and ask: ‘When did we last use that?’ and ‘Does my neighbour have one I can use or we can share?’’’

Meadow Farm model

£/ha

2013-141

2014-152

2015-16 3

Restructure 2015-163

Livestock gross margin*

646

516

521

631

Crop area gross margin*

726

653

707

609

Total gross margin

662

600

616

693

Overheads

508

496

503

378

Rent, finance and drawings

310

309

330

326

Margin from production

(156)

(204)

(217)

(10)

SPS/BPS and ELS

244

229

205

205

Business surplus

89

25

(13)

195

154ha mixed lowland farm (114ha owned, 40ha on FBT). Beef (suckler cows and finishers), sheep and arable. Proprietor, one full-time family worker and casual

1 Result   2 Estimated   3 Budget * Per hectare return for the area the enterprises occupy

Source: Andersons the Farm Business Consultants


Spring cropping improves arable farm results

Anderson’s Loam Farm model faces a cut in support and farm business income for 2015-16. But it would lose more by taking on an extra 200ha on a three-year farm business tenancy at £500/ha, with the same rotation.

A larger farmed area risked diluting management and travelling costs could rise. There would be extra finance costs for working capital and to rent short-term grain storage. Some additional machinery would need to be purchased and harvest casual labour would rise.

However a move to spring cropping over a longer period would bring better results, spreading workload, reducing labour and machinery costs, and giving potential weed and fertility gains.

Such a drastic change would demand rigour in achieving fixed-cost savings over three seasons.

The spring cropping example would include:

  • Rotation change to winter wheat, spring peas/beans, winter oilseed rape, spring barley or triticale.
  • Lower inputs
  • Lower overheads – labour and machinery
  • More even workload

Loam farm model

£/ha

20121

20131

20142

20152

20153 + 200ha

Year X3
spring crops (1,500ha)

Output

1,273

1,204

1,142

1,096

1,096

943

Variable costs

466

457

426

427

427

392

Gross margin

807

747

716

669

669

551

Overheads

394

404

407

410

402

293

Rent and finance

188

194

218

243

313

238

Drawings

72

73

75

75

56

75

Margin from production

153

76

16

(59)

(103)

(55)

SPS/BPS and ELS

240

243

226

217

210

217

Business surplus

393

319

242

158

107

163

Total business surplus

235,800

191,400

145,200

94,800

85,800

97,680

600ha of combinable crops (winter wheat, winter OSR and spring beans), 240ha owned, 360ha FBTs, owner, one full-time worker and harvest casual. Source: Andersons the Farm Business Consultants     1 Result   2 Estimated   3 Budget