18 August 1995

Growers – beware rising costs, warns CAP report

By Philip Clarke

WATCH out for rising costs!

That is the stark warning in a new report* from the University of Cambridge on the impact of CAP reform on UK cereal growers.

Based on a random sample of 550 arable farms, it shows that financial returns have increased noticeably since the survey was last undertaken in 1985/86.

"A part of the improvement is due to the introduction of arable area payments, which in 1993/94 accounted for 14% of the revenue for winter wheat," says the report. "But considerably more of the improvement is explained by a reduction in input costs, both variable and fixed."

In real terms variable costs for winter wheat are shown to have fallen 22% to £268/ha (£108/acre) between 1985 and 1993 and by 13% to £200/ha (£81/acre) for spring barley. Fixed costs, adjusted for inflation, have declined by about a third for both these crops.

Value fall offset

Combined with increased yield and arable area aid, these savings have offset the 37% fall in the real value of wheat and barley over the period. As such, winter wheat growers achieved a net margin of £318/ha (£129/acre) compared with an equivalent £203/ha (£82/acre) in 1985.

"The reduction in input costs is the anticipated response by growers to declining cereal prices," says the report. But this cost saving is more the result of lower input prices during the period than any major reduction in the physical quantities used. (See table.) "In this situation, cereal growers are clearly vulnerable to any increase in the unit cost of material inputs," it adds. And though the reductions in fixed costs appear to be "positive and permanent" (see table), the short-term prospects for variables are less encouraging.

Fertiliser increase

Fertiliser and spray have already started to increase, in part due to the weaker £, but also because manufacturers have been increasing margins to improve their share of a more prosperous cereals industry, the report observes.

Rents and land prices, which for a period have remained relatively static, are also now going up. "All these factors will increase the unit cost of cereal production and reverse the trend of cost containment, which has been apparent since the mid-1980s."

The report also shows how growers faired in different regions of the UK from the 1993 harvest.

Taking all cereals together the results show farmers in England made the highest net margin at £305/ha (£124/acre), followed by Scotland with £265/ha (£107/acre) and Wales with £148/ha (£60/acre). The key to success in England was yield, which, at 6.85t/ha (2.77t/acre), was 1.14t/ha (0.46t/acre) ahead of Scotland, leading to additional output from similar costs.

Gross margins similar

Other findings are that gross margins from milling wheat and feed wheat were similar and there was no big difference in the price paid by merchants and co-ops.

* UK Cereals, 1993/94 – The Impact of the CAP Reform on Production Economics and Marketing, is available from the Agricultural Economics Unit, Department of Land Economy, 19 Silver Street, Cambridge CB3 9EP. Price £12. &#42