24 May 2002

Barley lifts gloom of wheat price fall

A sharp drop in wheat

yields and a poor pea crop

were offset by an

unexpectedly good barley

performance at farmers

weeklys Easton Lodge last

year, helping the unit to

turn a modest profit.

Robert Harris reports

IT WAS the year that Easton Lodge farms manager John Lambkin had been dreading.

After three good years, wheat yield crashed in 2001, reflecting the tough sowing conditions the previous autumn and a dry period during the critical early summer months.

Between 1998 and 2000, the crop averaged 9.5t/ha (3.84t/acre). Last year, yield slumped to 7.96t/ha (3.2t/acre). The blow coincided with the biggest wheat area for several years, at 117ha (289 acres).

The wet autumn of 2000 proved a huge cost to the business. Had wheat yields held at the previous three-year average, Mr Lambkin would have had a further 175t to sell, worth £15,000 on the bottom line.

The cash was sorely missed. In the year ending Nov 30, 2001, Easton Lodge recorded a profit of just over £9400 (ignoring adjustments in opening and closing valuations), or £39/ha (£16/acre). While that is 40% more than the previous year (which was marked down after adjustments for year-end stocks) it is still too small to be sustainable.

"Although we achieved sensible drilling dates on much of the crop, output still suffered," says Mr Lambkin. Wheat, mainly Malacca, sown in mid-September produced a respectable yield, averaging 8.5t/ha (3.4t/acre). October-drilled Claire gave 1t/ha less, while that sown very late after sugar beet produced just 6.5t/ha (2.6t/acre). "It was a devastating result," says Mr Lambkin.

Accountant Jane Evans from Deloitte & Touche Agriculture agrees. "Over the past four harvests the average wheat price has been held at a consistent level, around £82/t, a reflection of the marketing policy adopted and the valuable premiums obtained. Output has therefore varied directly, and significantly, with yield, which can only become more critical to profitability."

Nevertheless, the thin crops were able to support reasonable bushel weights, despite a dry summer on the farms brashy soils. Mr Lambkin sold all his Claire, 214t, at harvest for £75/t. Milling wheat – Malacca and some Abbot – was sold forward for June collection, with the former making £90.50/t and the latter £77/t.

But that left 350t of Malacca unsold. Like many farmers – and traders – Mr Lambkin was unaware of the role that cheap Black Sea wheat was to play in the market over the winter. Grain prices lost 20% of their value in a few weeks.

With prices now at £78/t, compared with a budget of £89/t, that could hurt. "Everyone I talked to advised me to hold on to my milling wheat. I was bid £100/t back in the autumn. I should have taken it there and then," says Mr Lambkin.

Area aid payments on cereals and set-aside rose 7% compared with 2000 on the Continent. But, like all UK growers, Mr Lambkin watched as modulation, overplanting penalties and the stronger £ kept cereal and set-aside payments just below 2000 levels, at £217/ha (£88/acre). Overall, wheat output dropped to £941/ha (£381/acre) in 2001.

While that may have been disappointing, the 21ha (52 acres) of peas were an "absolute disaster", says Mr Lambkin. He grew a new variety of vining peas on contract for Advanta, which also suffered from the wet spring. "We struggled to get the crop in, and then it dried out – the worst thing that can happen to peas. Then it rained again and some split."

Yield fell 38% to just 2.84t/ha (1.15t/acre). While the crop managed to secure the main seed premium of £60/t over feed, it missed the £20/t electro-conductivity bonus for top-grade samples. Overall, output fell by a third compared with the previous year.

But there were some notable achievements last year that helped limit the damage. "Barley was an amazing success," says Mr Lambkin. "It produced a gross margin £100/ha ahead of wheat, and was only just beaten by sugar beet."

That is a complete turnaround from 2000. The main reason was Mr Lambkins decision to switch from Maris Otter, which had been grown for three years under a niche real ale contract. But poor yields and missed premiums had proved costly.

Newcomer Pearl yielded 8.62t/ha (3.49t/acre), 30% more than last years Otter, and Mr Lambkin sold it on contract for £8/t over feed, which worked out at £72/t after a small deduction.

Oilseed rape also had a good year. Mr Lambkin secured £30/t more than in 2000, making £149/t delivered to a local home, despite being a forced harvest seller.

"We have to unload something at harvest, when it is difficult to get lorries, so the terms of the contract suit us well." That price, plus a better yield, more than offset the Agenda 2000-induced cut in area aid, which fell 19%, or £1500, across the area.

Sugar beet also had a good year, despite being drilled in the last two days of April. "It grew like fun all year. We harvested just over 1100t, about 200t above quota."

At 2001 yields, Mr Lambkin could reduce his area by 3ha (7.4 acres) and still make quota. Replacing that land with a cereal would boost the farms gross margin by up to £2000 or more. "But a dry year could easily hit yields, which would then put us on the back foot for the next two seasons."

Mr Lambkins decision to simplify the crop mix at Easton Lodge (see diagram p28) has paid off. In 2000, linseed and spring barley were dropped, which boosted output by £3000. Last year, herbage seed was chopped from the rotation, which helped output rise a further £6000.

This strategy had also been suggested by Deloitte & Touche, to take advantage of crops which return a higher output/ha while simplifying operations.

Variable costs proved a mixed bag. While the spend on sprays was kept under control, fertiliser bills rose sharply.

Despite using new chemistry, Mr Lambkin spent nearly 20% less on wheat sprays last year, at £97/ha (£39/acre). "We are part of the A1 buying group, and price savings are filtering through very nicely. And we are targeting herbicides much more carefully – at £60/t for new crop wheat, you cant afford not to," he says.

Dry weather at the end of the season also allowed Mr Lambkin to omit the ear-spray fungicide.

Gross margin ended up at £730/ha (£296/acre), compared with £803/ha (£325/acre) the previous year, knocking wheat from first to third place in the combinable crop rankings.

Disease control on the barley, not surprisingly, cost a lot less. "We saved about £30/ha, mainly through reduced fungicide use." Spray costs were slashed by a quarter to £77/ha (£31/acre).

Peas proved expensive to grow. "The break-even price tells the story. We pay a horrendous price for seed and we had pretty high herbicide costs too." The crop was thin and cleavers proved a problem. That helped push the total spray bill for the crop up to £91/ha (£37/acre), 25% higher than the previous year. The combined effect of poor yields and higher costs hammered the gross margin – at £427/ha (£173/acre), it was 40% down on the five-year average.

Total fertiliser spend rose by about £3000 to just over £11,500 for the harvest year. All of this was nitrogen – apart from some potash for peas, the farm took another PK holiday.

Part of the increase was due to the bigger area of nitrogen-hungry winter wheat, but prices also rose substantially over the year, reflecting the determination by manufacturers to raise prices to more profitable levels.

"I bought prilled urea in January for £127.50/t. The previous year I paid just £88/t for a bad-debt consignment," says Mr Lambkin.

Overheads continued to fall during 2001, reflecting the trend over the past five years (see graph right). "This shows that John has been keeping a close eye on costs," says Miss Evans. The effect of this is more evident when it is compared with inflation over the same period (see graph p28)."

Labour costs came down almost £4000 in 2001, to just over £41,000, despite a 3.5% increase in the agricultural wage rate during the year. "We managed to reduce casual labour, mainly as a result of changes in the pig unit which means we can now handle big bales," says Mr Lambkin. Some savings were also made on secretarial costs and general tightening up on student overtime.

Nevertheless, the Easton Lodge wage bill remains about twice as high as the Deloitte & Touche sample for similar farms, at £171/ha (£69/acre). But it is hard to compare directly, says Miss Evans, as labour is required to handle straw, farmyard manure and slurry from the pig unit.

Power and machinery costs rose slightly, by £12/ha (£4.85/acre) to £275/ha (£111/acre), about 40% above Deloitte & Touche figures. Again, the pig unit clouds the figure somewhat, though Mr Lambkins policy of growing premium crops does increase the need for spare capacity to keep operations timely.

The overall repair bill climbed to £19,277. Tractor repairs accounted for the lions share of the £3000 extra spend. "These rose by £2000, mainly due to a hydraulic pump failure on the Fendt 312 tractor. We bought two eight years ago. We were told they would last 10 years or 10,000 hours, and that is how long they will have to last."

A £1500 bill for the Land Rover at 72,000 miles, which is also starting to show its age, did not help. "Machinery and repair bills were expected to increase with the minimal replacement policy adopted over the past few years," says Miss Evans.

"However, it is important to review the costs incurred to appreciate the implications of not reinvesting in new equipment and to keep control of underlying costs."

Fuel costs increased in line with general price rises during the year, up about £870 to total £44/ha (£18/acre).

Property repairs have fallen consistently in recent years, and 2001 was no exception. At £22/ha (£8/acre), they are likely to remain in line with other farms in Deloitte & Touches sample, and are half the levels of five years ago.

"When times get tough, this is an area where it is possible to make some useful short-term savings to ease cash flow," says Miss Evans. Water rates showed a particularly big saving, due mainly to a one-off charge in 2000 to carry out borehole repairs.

The balance sheet for the year ending Nov 30, 2001, shows that net worth of the business declined by £30,000 over the year. Stock differences and a shift in the debtor/creditor balance as well as a sharp drop in the amount of cash in the bank saw a £10,000 drop in net current assets, to just over £191,000. But fixed-asset value fell by £20,000 on the year, mainly due a reluctance to spend on new machinery, allowing depreciation to erode the figure.

"This appears to be a very common scenario," says Miss Evans. "Times are hard, and in many circumstances it has been necessary to delay investment."

As far as the cash flow is concerned at Easton Lodge, during the 12 months £15,891 flowed out of the business, compared with £4500 in 2000.

Adding back depreciation of £25,479 to the profit on ordinary activities (per accounts), Easton Lodges arable unit operations generated £32,199. That was more than £6000 down on the year.

As the manager of the business, Mr Lambkins salary and expenses are taken out of the profit to allow these accounts to be compared with those of other tenants or sole traders.

Like many other arable businesses, Easton Lodge has curtailed non-essential expenditure, and is suffering from a declining asset base and relying more and more on depreciation to make a profit.

The need to invest (just £5500 was spent during the year on capital purchases) cannot be put off much longer, and property charges will also have to rise at some point.

The position is not sustainable, and turning things around on a farm of this size will be a struggle for the foreseeable future.

As has been discussed in previous years, expanding the unit to achieve economies of scale has been a favourite suggestion. But repeated attempts to tender for farm business tenancies and contract farming opportunities, and even discussions with neighbours over machinery and labour sharing, have all come to nothing.

Until now. From Oct 1, farmers weekly Farms will take over 180ha (445 acres) at nearby Sacrewell Lodge, Thornhaugh, on a rolling, five-year farm business tenancy agreement.

Outline plans include upgrading the main tractor, and employing a management trainee, probably a college leaver. Initial calculations show that the farming business will increase net income by £20,000, at a wheat price of £75/t.

This, says Miss Evans, provides an ideal chance to restructure the cost base and realise overhead savings. Our future annual reports from Easton Lodge will reveal just how well the new venture works. &#42


Crop ha

Winter wheat 117

Winter barley 20

Oilseed rape 26

Sugar beet 19

Dry peas 21

Grass ley 1

Set-aside 21

Total 225


2001 2000

Yield (t/ha)

Winter wheat 7.96 9.05

Winter barley 8.62 6.60

Oilseed rape 4.29 3.87

Sugar beet 57.47 52.79

Dry peas 2.84 4.59

Price (£/t)

Winter wheat 86 80

Winter barley 72 73

Oilseed rape 149 119

Sugar beet 27 30

Dry peas 141 155

Output (£/ha) (inc area aid and straw)

Winter wheat 941 1,022

Winter barley 979 832

Oilseed rape 893 775

Sugar beet 1,575 1,576

Dry peas 650 984

Set-aside 218 221

Variable costs (£/ha)

Winter wheat 211 219

Winter barley 149 207

Oilseed rape 144 143

Sugar beet 710 674

Dry peas 223 203

Set-aside 3 20

Gross margin (£/ha)

Winter wheat 730 803

Winter barley 830 625

Oilseed rape 749 632

Sugar beet 865 902

Dry peas 427 781

Set-aside 215 201

Oilseed rape performed well, with good yields and a much-improved price boosting output.

John Lambkin describes last years wheat yields as devastating. The poor output stripped thousands off the bottom line.

Big savings were made on cereal spray costs last year at Easton Lodge. But peas proved expensive to grow and the fertiliser bill rose by 35%.

Easton Lodge foreman, David Cham, is a dab hand at keeping things running. But a big bill for the Fendt 312 tractor and another for the Land Rover contributed to a jump in overall repair costs.


Wheat Barley OSR Peas

Average 106 91 181 303

cost

Area aid 27 25 59 88

Break-even 79 66 122 215

price

2001 86 72 149 141

harvest price


2001 2000

Areas (ha)

Under cultivation 225 225

Permanent grass 12 12

Road and buildings 5 5

Farmed area 242 242

Gross margin (£/ha)

Farm gross margin 606 611

Other income 53 50

Total gross margin 659 661

Fixed costs (£/ha)

Labour 171 187

Power and machinery 275 263

Property charges 22 27

Other overheads 36 41

Total fixed costs 504 518

Net farm income 155 143

before rent

Rent 116 116

Net farm income* 39 27

Loss/profit on sale (12) 21

of previous harvest

Net farm income 27 48

(per accounts)

* harvest year basis

Wheat following sugar beet suffered a big yield drop, producing almost 25% less grain than the September-drilled crops. Mr Lambkin wishes he had sold milling wheat earlier to help make up some of the shortfall.

Sugar beet topped the gross margin stakes as usual, but winter barley, the crop of the year, came a close second and left wheat trailing.


2001 2000

Labour 41,339 45,229

Power and machinery

Machinery and 19,277 17,102

vehicle repairs

Fuel and oil 10,719 9,845

Electricity 2,673 2,148

Vehicle tax and (20) 40

insurance

Contract & hire 9,263 8,380

Plant and mach 24,660 26,034

depreciation

Total 66,572 63,549

Property charges

Water rates 968 2,142

Property repairs 3,430 3,545

Depreciation 819 895

Total 5,217 6,582

Other overheads

Professional 180 250

Telephone 2,482 2,428

Office 3,889 3,817

Subscriptions 1,397 1,574

Sundry expenses 901 1,783

Total 8,849 9,852

Rent 28,000 28,000


2001 2000

Gross margin

Cultivations 143,799 152,886

Other farm income

Contracting 3,099 2,590

Rental income 7,000 7,363

SSSI agreement 1,294 1,294

income

Sundry income 1,505 734

Total 156,697 164,867

Fixed costs

Labour 41,339 45,229

Power and 66,572 63,549

machinery

Property 5,217 6,582

charges

Other 8,849 9,852

overheads

Total 121,977 125,212

Net farm 34,720 39,655

income before rent

Rent 28,000 28,000

Net farm 6,720 11,655

income

Overheads fell in 2001, in line with the recent trend, though labour bills remain high for the size of the unit.

Deloitte and Touche Agriculture is a leading firm of agricultural accountants, taxation and business advisers. It concentrates on providing practical solutions for professional farmers, landed estates and agricultural businesses.

Jane Evans and John Young analysed the accounts.