19 November 1999

Action needed now to improve farm incomes

There is plenty of scope for farms to improve their

business performance, says a firm of accountants,

one reason it remains upbeat about UK farmings

prospects. Robert Harris reports

SINCE the sharp downturn in farm incomes began three years ago, many experts have been forecasting rationalisation and an exodus from the industry on a scale not seen for decades.

But Gary Markham, agricultural partner with national accountants Grant Thornton, believes there is still plenty of headroom for most businesses to improve.

The latest survey of 175 Grant Thornton clients farming 52,600ha (130,000 acres) across the UK shows how far many businesses remain below par, he says.

The top 25% of farms with combineable crops, for example, made a net farm income after rent and finance of £242/ha (£98/acre) in the year ending June 1999, a massive £318/ha (£129/acre) ahead of the bottom 25% (see table). Even average business could only halve that gap.

On arable farms with root crops, the difference was even bigger. And on dairy and arable enterprises, the best 25% achieved a net farm income five times greater than the £49/ha (£20/acre) average.

Grant Thornton forecasts for the next two years show net farm incomes in all three groups slipping a further £17/ha (£7/acre) (see graph). "We expect inputs to fall 15% in year to June 2000, and a further 1% the year after that," says colleague Tom Chapman.

"But we have assumed the average wheat price will fall to £70/t this year, down £4, and barley will be worth about £71/t. We have also assumed an oilseed rape price of £105/t."

Many farmers need to get their businesses back on track, says Mr Markham. "My message is that the bottom 25% of farmers can and should be doing something about their performance. Three-quarters of farmers should be using the top quarter as a target to ensure their survival over the next five years.

"Some farmers may have enough in the bank to last two or three years, but not much longer and prices could well stay at these levels for the next five years. The reality is starting to bite."

The vast majority of businesses can succeed, Mr Markham insists. "These are real figures that the best farmers are achieving. It is not because their farms are bigger, or of a better soil type – our sample shows an even spread of both from the top to the bottom performers. It is all down to management ability."

The first step is to calculate costs, to the bottom line, to provide a barometer of business health. This shows the top quartile are producing wheat for just £52/t, well below the average figure and £34/t better than the bottom quartile (see table).

A closer look at the books reveals how the top arable performers achieved that result.

For a start, yields were higher. With wheat, for example, top-flight farmers achieved 8.2t/ha (3.3t/acre), over 6% above the average group and 11% better than the bottom quartile.

"Although they spent a similar amount on seeds, fertiliser and sprays, the top group got more out of them, through better timeliness, perhaps by using an agronomist," says Mr Chapman. "This made the vital difference, since, interestingly, the market price was almost identical across the three groups for cereals (£74-75/t) and oilseed rape (£152-154/t)."

Gross margin in the top 25% bracket hit £543/ha (£220/acre), 10% better than average.

Top performers also made much better use of labour, and power and machinery, which helped to dilute costs, says Mr Chapman. "This is a key point in arable farming. They started off with a lower cost base, spending £91/acre, £28 less than average.

"But they also earned the equivalent of £14/acre by contracting their machinery out, effectively reducing power and machinery and labour costs to £77/acre, a saving of more than £30/acre compared to the average." The bottom 25% of farms spent almost twice as much, he adds.

Using such figures as a benchmark will reveal what steps a particular farmer needs to take, says Mr Markam. "There may be several options which suit. "If he decides the changes needed are really beyond his capabilities, he could sell up. Alternatively, he could decide to let his farm on a farm business tenancy, realise his capital and live off the rental income."

However, most farmers will want to, and are capable of, staying in business, Mr Markham believes. "We can show, in most cases, this is perfectly possible."

For many, simplification may be the answer, allowing them to focus on the core business. Grant Thorntons figures show that retaining beef and/or sheep enterprises with an arable enterprise can be an expensive luxury. Although the arable gross margin was as good, the overall margin dropped £49/ha (£20/acre) to £174. Add on the extra fixed costs – usually labour – and net farm income drops to zero.

Apart from this, the most drastic measure is to contract the farm out. "But most farmers want to continue farming. For some, the best option might be to retain one tractor, a drill and a sprayer, and buy the other services in from a neighbour or contractor – for a fixed quote. That way, this farmer retains control of key operations, but at a greatly reduced cost."

For other businesses, less drastic measures may be needed to close the gap. Buying groups can save about 10% on input costs, especially where farmers are too busy to nail the best deal, says Mr Markham. Seemingly obvious steps, like using farm-saved seed, can also be overlooked.

"And a worker coming up for retirement can provide a business with a tremendous opportunity to restructure, without all the difficulties involved in laying off staff." &#42

Farm income (£/acre)*

Top Ave Bottom

25% 25%

Gross margin** 242 212 181

Fixed costs

Labour 13 22 30

Machinery 78 97 113

Property/admin 36 46 59

Total (127) (165) (202)

Management

profit 115 47 (21)

Rent (17) (16) (11)

Finance (21) (21) (22)

Non-farming

income 21 25 23

Net farm

income 98 35 (31)

*Combinable crops

** Includes contracting and other farm income.

Breakeven price – winter wheat

Top 25% Average Bottom 25%

Yield (t/acre) 3.33 3.13 3.00

Arable area aid (£/acre) 96 96 96

Variable costs (£/acre) 92 95 98

Fixed costs (£/acre) 127 165 202

Total costs (£/acre) 219 260 300

Rent and finance (£/acre) 38 37 33

Drawings & tax 55 55 55

Total (£/acre) 312 352 388

Break even price (£/t)* 65 82 97

Other income (£/t) 13 13 11

Break even price (£/t) 52 69 86

*After rent & finance, arable area aid and drawings and before other income.