8 November 1996

Industry looks in good shape, says banker

By Philip Clarke

FARMERS may be looking at lower profits for 1997, but they are not staring disaster in the face.

"Most farmers in the last few years have done an excellent job of replacing old equipment with newer, higher capacity items," says Midland Bank agriculture director, Norman Coward, writing in the banks latest Forward Planning booklet. "Many have expanded and gained economies of scale. Many have reduced the burden of borrowing, including fixing their interest rates at historically low levels. The industry is therefore in good shape."

Emphasising the importance of good budgeting, Mr Coward warns of lower margins and greater volatility in the year ahead. Record profits in 1995/96 are unlikely to be repeated as higher prices have led to increased output of grains, oilseeds and milk products throughout the world, which are starting to pressurise markets.

For example, the Midland Bank budgets for feed wheat harvested next summer suggest a gross margin of £753/ha (£305/acre) from a crop of 7.4t/ha (3t/acre) – 6% lower than forecast for the current season.

This assumes a static wheat price for 1997/98 of £105/t, lower area aid of £240/ha (£97/acre) and an 8% rise in variable costs to £264/ha (£107/acre).

The area aid figure includes a 7% cut, in line with EU Commission proposals for saving money to help pay for the BSE crisis. This is now looking less likely as numerous member states continue to oppose the measure. "These figures were done in September," explains Mr Coward. "If we did them again now, we would leave out the 7% cut. We were surprised the council rejected this proposal, but it serves as a reminder of how strong the German and French farm lobbies are."

The figures also assume a green exchange rate of 81p/ecu. Following last weeks revaluation this is now the case, and further changes, which would put more pressure on subsidies, are thought unlikely even if sterling continues to strengthen.

Despite that, UK farmers will still feel the effects of any further currency appreciation, explains Mr Coward, as a stronger £ makes exports more difficult and imports more competitive. "This will be a particular problem for wheat."

The Midland Bank budgets also point to downward pressure on other sectors of the industry. Compared with last years report it signals a 12% fall in oilseed rape gross margins, a 5% fall for dairy cows and a 26% drop for 18-month beef. Lowland sheep should remain static while returns from indoor pigs are expected to continue improving in 1997/98.n

Norman Coward says UK farms are well placed to deal with a price sqeeeze.