2 February 1996

Cereal prices climb as dependancy on aid falls

By Philip Clarke

CEREAL growers are becoming less dependant on arable area aid payments to make a profit, according to provisional figures from accountant Grant Thornton.

Based on accounts from cereal farms whose financial year-ends take in the 1995 harvest, average net farm income after rent, finance and sundries comes to £149/acre. This includes average area aid of £110/acre, equivalent to 74%.

Last year, area aid came to 127% of net farm income and the year before that it was 177% (see table).

This trend clearly demonstrates the impact of higher grain prices this season, with crop values making up a greater proportion of gross margins, explains Grant Thornton farm business adviser, Gary Markham. "But even at this seasons prices, the average farm would still be marginal if area aid was taken away.

"What this shows is that the CAP is working well as a social policy, keeping people on the land who would otherwise be swallowed up by the more successful farmers," he says.

But Mr Markham is quick to point out that "more successful" does not necessarily mean "bigger".

More detailed accounts (based on 73 farms in the west midlands and eastern counties) for the 1994 harvest year show that net farm income after rent and finance for the smallest farms (under 500 acres) came to £72/acre. This compared with £63/acre for medium farms (500-1000 acres) and £87/acre for large farms (over 1000 acres).

For while the larger farms appear to have an advantage in terms of gross margin (at £264/acre compared with £253/acre on smaller farms), a breakdown of fixed costs shows the sub-500 acre units making savings in labour (£23/acre against £53/acre) and rent (£14/acre against £29/acre).

Diseconomies of scale

"There are considerable diseconomies of scale at play," observes Mr Markham. It is also significant that the average size of the top 10% of farms, ranked in terms of profitability, is less than the average farm size for the whole sample.

"As the graph shows, management profit per acre tends to fall away above a certain size and fixed costs to rise. This is because attention to detail starts to suffer, while the farmers skills of management and delegation are put to the test." Mr Markham puts the optimum farm size at about 1000 acres.

The key to success, he says, is agronomy and cost control.

It is significant that the top 10% have much lower "sundry receipts", suggesting they are more focused on their mainstream activity – growing combinable crops.

The fixed cost analysis also shows how the best farms have contained their overheads to less than £150/acre, compared with nearer £250/acre for the bottom group.

Yield and marketing are also critical. "If you are in the top yield band, you are almost certainly in the top profit band, whether you farm 300 acres or a thousand," says Mr Markham.

Management profit

Last year, the top 25% achieved a management profit of £141/acre compared with £76/acre for the average and a loss of £4/acre for the bottom 25% (see graph).

Looking at the results over a longer time span, the Grant Thornton survey shows a steady improvement in farm gross margins from £223/acre in 1991 to £259/acre in 1994.

And in contrast to recent suggestions by other accountants, the Grant Thornton figures detect no increase in overall fixed costs which have been steady at about £180/acre before rent and finance over the same period.

"There has been more investment in machinery over the last two seasons, but it has been well controlled," says Mr Markham. For the top 10%, last year saw another drop in fixed costs to £126/acre.

There is clear evidence of a trend within overheads for labour to decrease and machinery to increase, though this may now be reaching a plateau. For example, last crop year the average farmer spent a net £42/acre on replacement machinery compared with £49/acre the previous season. The top performing farmers, who did most of their upgrading in 1993/94, spent just £15/acre last year.

As such, these farmers were better placed to increase their private drawings which went up from £44/acre to £71/acre. The average farmer stood still with drawings of just over £50/acre.

Meanwhile, the worst performing group were at least able to make a substantial dent in their borrowings, reducing them by an equivalent £77/acre. "Again, this is indicative of arable area payments supporting the more vulnerable farmer, keeping him on the land," says Mr Markham.

And even though area payments are proving less crucial in the current season, their long-term importance should not be underestimated, especially given the continuing rise in variable costs. &#42


Fixed cost analysis (harvest 1994)

(£/acre)0-500500-10001000+

acresacresacres

Labour234053

Machinery989371

Property292527

Admin333222

(£/acre)TopAverageBottom

25%25%

Labour243740

Machinery7089116

Property232731

Admin243046


Income up to £149/acre as aid dependancy falls


Profitability of combinable crop farms

*199519941993

Total gross

margin311259236

Fixed costs156184189

Farm

Management

profit1557547

Sundry receipts213134

Business

Management

profit17610681

Rent and finance273535

Net farm income1497145

* Provisional


Significance of area payments

(£/acre)*199519941993

Average area payment

(including

set-aside)1109182

Net farm income

(after rent and

finance)1497146

%

Area payment

as % of net farm

income74127 177

* Provisional