Q1. To crop or not to crop, that is the question.
The solution to maximising profit is not as straightforward as fallow v first wheat, says Aubourn’s Philip Wynn.
“Unless you contract out the farming operations or significantly reduce existing labour and power costs then simplifying cropping like this won’t help the bottom line.
Careful analysis is required to understand how best to optimise your return.”
Matching costs with returns and ensuring that cost of production levels are sustainable is essential, he says.
“When you know your real costs it is easier to determine the best strategy.”
Those with large “sunk” costs they cannot easily shed, such as being one or two years into the life of a new combine or tractor, may find the contribution to overheads of marginal crops may be better than fallow, suggests Bidwells’ Carl Atkin.
And don’t forget a farmer with a single payment history as a combinable crop farmer is fairly certain to have a declining payment over the next five to seven years and beyond to 2012, adds Andersons’ Francis Mordaunt.
“If you still want to stop, first work out where your alternative income sources will come from.
“With the prospects for volatility in our markets continuing, keeping flexibility to take advantage of positive market changes is essential,” Mr Wynn suggests.
Q2. What can I do to protect my single payment cheque?
“There is nothing growers can do about modulation and financial discipline rates which could cut the payment by about 27% combined by 2012,”says Mr Atkin.
“We are encouraging farmers to treat the SPS income independently from other enterprises for budgeting purposes and to calculate the likely effect that a declining single payment income will have on their business,” adds HSBC’s Micheal Summers.
“But of course maximising Pillar 2 payments especially entry-level and higher-level stewardship must be a given to recapture the maximum funds,” says Mr Atkin.
There are those who are concerned about environmental stewardship funds drying up, says Mr Mordaunt.
“However, we think there will be a move towards support through land management payments such as ELS and HLS away from the single payment.
Rural development support is more WTO-friendly, more acceptable to taxpayers and likely to remain a high priority for any future UK government.
This may mean higher rates of modulation to ensure funds are available and if you are not in ELS or HLS, the money will be taken away without coming back.”
Ensuring your business does meet cross-compliance regulations is essential, adds Aubourn’s Robert Hall.
“Failure to keep adequate NVZ records, exceeding RB209 recommendations, and not having 2m margins in place are the most common breaches.”
Hedging euro exchange rate movements may be worth considering to control rate volatility in respect of the single payment says Mr Atkin.
Mechanisms are available to reduce exposure, Mr Summers says.
“Businesses can either lock in to a known exchange rate, or take an option to lock in to an exchange rate if the market moves against them.
For businesses with costs and income in a foreign currency such as euros, a natural hedge may exist with currency being received on sales simply being “recycled” to pay costs.”
Q3. Does beet have a future in my rotation?
“For many businesses in eastern England, sugar reform will have a greater impact than the CAP reform which introduced the single payment,” says Mr Atkin.
“For the past few years, beet has been providing the bulk – if not all – the profit on many arable farms.”
For some, sugar beet will remain as a break, but will migrate towards the better land; others may consider oilseed rape a better bet, he notes.
Transitional compensation will help cushion the blow of a price drop of about 10/t, says Mr Mordaunt, but it will largely disappear by 2012.
“For beet to compete, a number of improvements will be needed.
For most growers these will need to come from overheads, and as harvest and haulage is such a large part of cost, the savings will come from co-operation and collaboration throughout the industry including growers, contractors and British Sugar.
“There is no magic solution,” Mr Atkin concludes.
Because sugar is a commodity, the key message is to maximise production on the smallest area – minimising C production – and controlling fixed costs.