27 February 1998

CROP EFFECTS NOT SO CLEAR CUT

CAP reform is set to impact

on UK arable farm profits in

just three years. Here we

ask Bob Blakeman, head of

Axients recently formed

arable division, to consider

cropping implications under

current proposals and hints

on how to prepare

IT WILL probably be the spring of 1999 before the final decisions on CAP from 2000 to 2006 are decided. While modulation remains a possibility, hopefully, individual member states will be given greater control of CAP expenditure so as not to disadvantage our farming structure.

In the meantime, until these finer points are ironed out, the watchwords are "be prepared". Consider carefully the alternative scenarios and consider your possible options.

While the devil could still be in the detail, the intention of the proposals under Agenda 2000 are clear and likely to receive a strong measure of support within the EU.

Price support for production in the form of intervention will provide an ultimate safety net, but only at rock bottom prices – around £65/t for cereals. Instead, there will be a greater emphasis on direct payments de-coupled from production, and with the emphasis on qualifying criteria which favour agri-environmental and socio-economic improvements.

These changes are justified by the commission as an attempt to gain a greater orientation to world market prices, while enhancing the economic potential and environmental value of rural areas.

This is set against a background where farm incomes have risen by an average of 4.5% each year from 1992-1996 – though with obvious variations between member states – and there is judged to have been an element of over-compensation under the existing CAP. This was brought about by stronger than envisaged market prices for cereals and oilseeds, favourable agrimonetary movements, and a continuing decline in agricultural employment.

So what might Agenda 2000 mean to an arable farmer in the heart of England? The proposals provide for an increase in area payments, partially to compensate for the 20% reduction in intervention prices. However, the area aid will be the same for all crops, with a top-up for protein crops. These will be equivalent to £300/ha and £329/ha respectively at the expected July 1998 ecu exchange rate. All of which means an increase of £52/ha for cereals and a decrease of £150/ha for oilseed rape based on the budgeted 1997 payments.

However, it has recently been announced that the penalties for exceeding the maximum guaranteed area (MGA) for rape, and for the EU market price exceeding the world reference price, will bring OSR area payments down by 18% this year – or about £78/ha.

So, while the returns from oilseed rape are set to decline under Agenda 2000, this is likely to be less sudden than originally envisaged. It will instead be a continuation of the downward trend in support brought about by the cumulative reduction in the MGA.

The initial reaction to this lower area aid for break crops is to look at margins at a crop level and think about switching to cereals. A number of pundits are predicting "wall to wall" wheat in 2001. But is this likely to be the case?

Looking at an example 400ha (988-acre) farm with combinable crops, it is interesting to compare the performance this year with the situation in 2001, if the Agenda 2000 proposals go through. As with all projections, there have to be assumptions on yields and prices, but the trends and relative profitability of different options are valid. The figures assume a 5% increase in fixed costs, with variable costs held to current levels.

Profit set to halve

For this farm with a September year-end, the profit is projected to fall from the £123,405 achieved in 1996 to £56,717 in 1998 – a fall of 54%. This results from a 15% reduction in grain prices, a 7.5-13% reduction in area aid – depending on crop – and almost an 8% increase in fixed costs.

Of the options available in 2001 we have looked at either retaining the existing rotation, but replacing the set-aside with wheat, or growing continuous wheat. Assuming similar yields for continuous wheat to those currently being achieved for first and second wheat, continuous cereals would show a profit of £70,400, compared with £55,292 for the existing rotation.

However, figures for individual crops never tell the full story, and there are a number of issues associated with continuous wheat that are likely to make it considerably less attractive. In our figures we have assumed similar yields with continuous cereals as for cereals in the rotation, but this is unlikely to be the case.

Despite progress with seed dressings for take-all and potential improvements in yield through plant breeding, the benefits of winter oilseed rape as a break crop are likely to far outweigh these. Work by the Arable Research Centres with 30 crop sequences over a seven-year period showed an average yield response from first wheat after winter osr of 31% compared with continuous wheat.

Other significant benefits include improved opportunities to deal with grass weeds and soil structure problems, and opportunities to reduce labour and machinery peaks in summer and autumn. A yield reduction of 15% would not be an unreasonable expectation for continuous cereals and this would produce a dramatic fall in profit to only £36,225 for this scenario.

In addition, the prospect of a further 3+m tonnes of wheat coming off the combine in August would have major implications for machinery capacity and grain markets.

In all of this there is room for optimism. The figures in the table show that profit could at least be maintained at current levels, with grain at todays prices. Furthermore, there could be a long-term weakening in sterling and subsequent green revaluations, also increasing returns.

On the other side of the equation, grain and/or oilseed prices could have further to fall. This means there is no room for complacency, but there is scope to make savings in fixed costs. A more scientific approach to crop production, coupled with careful buying of inputs could lead to further reductions in the projected unit cost of production.

Assess your business

The key message is to take stock of your business. It is now more important than ever that you assess your current business position and review and compare your technical and business performance with other farms.

Dont be afraid to take advice and involve others in planning for the future. Farm business surveys can track your business performance, and assess the reality of your current position.

Also, be a pessimist when budgeting and review progress regularly. Having taken these steps, you will be in control and be prepared for much of the uncertainty that lies ahead. &#42

Plan for change by calculating costs now – Axients Bob Blakeman.

Plan for change by calculating costs now – Axients Bob Blakeman.

Do Agenda 2000 proposals signal a turning point for crop rotations. Rape looks set for a tumble and wall-to-wall wheat the order of the day. But careful consideration of costings suggest otherwise.

Past and present: 400ha arable farm (£)


Cropping Area (ha) 1996 1998 2001(A) 2001(B)

1st wheat 115 96,830 80,040 4,870 285,600

2nd wheat 55 42,625 35,090 51,750

Winter barley 95 68,875 55,622 60,562

Winter osr 95 84,075 72,105 61,750

Winter beans 20 13,180 12,580 11,560

Set-aside 20 5,820 5,280 0

Total Margin 311,405 260,717 270,492 285,600

Fixed costs 188,000 204,000 214,200 214,200

Farm profit 123,405 56,717 55,292 70,400

(A) Same rotation as 1996 except set-aside area now second wheat.

(B) Continuous winter wheat.

Assumptions

Product 1996 1998 2001

Yield Price £/t Yield Price £/t Yield Price £/t

1st wheat 8.6 95 8.6 80 8.6 80

2nd wheat 8.0 95 8.0 80 8.0 80

Winter Barley 7.5 90 7.5 75 7.5 75

Winter osr 4.0 170 4.0 160 4.0 150

Winter Beans 4.2 100 4.2 100 4.2 95