9 February 1996

95 was peak for arable profits and now slow decline

By Philip Clarke

ARABLE profits have peaked and are now expected to start falling, albeit gradually, as the end of the century approaches.

That is the prediction of accountant Grant Thornton, based on a number of assumptions about prices, support payments and costs.

According to farm business consultant, Gary Markham, area aid is here to stay and should be maintained at 1995s levels for the rest of the century. So long as there are no overshoots or major currency movements, this would keep rates for cereals at £109/acre, oilseeds at £193/acre, pulses at £157/acre and set-aside at £138/acre.

And while crop prices are bound to fluctuate in line with world market movements, the Grant Thornton analysis assumes a wheat value of £115/t, oilseed rape at £175/t and pulses at £128/t for the next five years. Yields are also held constant, based on the average of the last four years.

Variable cost change

But variable costs (seeds, fertilisers and sprays) are expected to show a 20% increase this season and to continue climbing at a rate of 4% a year to the year 2000. "Margins have been tight in the supply industry for a number of years – they are unlikely to let them drop back now," says Mr Markham.

Further increases are also forecast for fixed costs, with repairs, property charges and administration moving up 4% in line with inflation.

Depreciation charges are set to rise until 1997, reflecting recent investment in new machinery. But thereafter they should drop back.

Labour costs are assumed to remain steady as annual increases in the minimum wage are offset by efficiency gains.

Against this background of steadily rising variable costs and static crop output, gross margins on combinable crop farms in the east midlands and eastern counties are expected to slip from a 1995 peak of £318/acre to £264/acre by the end of the century (see graph).

Fixed costs are also set to rise gradually over the same period. As such, average management profit (before rent and finance charges) is seen to decline from a current rate of £133/acre to just £64/acre.

Although the general trend is downward, the outlook is not one of "doom and gloom," stresses Mr Markham.

"Our client base shows there is a huge range of performances between the top and bottom in terms of profitability. The top 10% usually have profits around double that of the average. This means there is great potential for those at the lower end to make the most of the area aid lifeline and pull themselves to a more secure position.

"The danger is that the emergence from a loss-making position in 1993 to a profitable situation in 1995 will give these farmers a false sense of security," he adds. "But at least they now have a chance to get their businesses in shape."

For the average and top performing farmers, Mr Markham recommends the priority should now be on making proper provisions for retirement. "It is essential the next generation of farmers does not have the burden of supporting the current generation."

Shift of emphasis

And while he fully expects arable area payments to continue for the forseeable future, the emphasis is going to shift on what a farmer has to do to qualify for them. Environmental strings will be attached.

"We should therefore be deciding and advocating what criteria we would like to work with, rather than waiting for it to be imposed on us as has happened with livestock haulage.

"We should be setting the agenda," says Mr Markham.

Gary Markham: Environmental strings will be linked to area payments.