14 June 2002

Its all change to lift arable profits

Big changes are afoot at

farmers weeklys Easton

Lodge Farm in a bid to

boost arable profits.

Robert Harris reports

IN 1966, when farmers weekly took over the traditional farming tenancy at Easton Lodge, farming provided a good living.

And, for the next 30 years, the 242ha (598-acre) farm, part of the Burghley Estate, near Stamford, Lincs, continued to turn a tidy profit.

Few could have predicted how quickly that would change. Collapsing commodity prices, the erosion of farm support and a strong £ have undermined the businesss viability since 1997.

Like many arable farms, income has dropped to unsustainable levels, despite best efforts by farms manager, John Lambkin, and the team to simplify cropping, maximise output and cut costs wherever possible.

"Clearly, farming about 600 acres on grade three, drought-prone, brashy soils is no longer viable," says Mr Lambkin. "We are struggling to make a profit, and attempts to turn things around over the past five years have not been particularly positive."

In that time, the mix of crops grown at Easton Lodge, including cereals, pulses, oilseeds and sugar beet, has produced an average annual net farm income of just £10,700, or £44/ha (£18/acre). "That is just about enough to pay the supermarket bills," says Mr Lambkin. "Clearly, there was a need to review what we were doing."

For several years he has been trying to boost profits by taking on extra land, which would improve economies of scale without the need for too much capital investment.

"I have been looking for additional land for several years. I tendered for three farm business tenancies on both the Burghley and Milton Estates, but to no avail. And talk about greater co-operation in our buying group, perhaps through a machinery and labour ring, came to nought as other businesses either specialised, sold up, or grew."

Then, last Christmas, the trustees of the William Scott Abbot Trust, which farms 180ha (445 acres) at Sacrewell Lodge, Thornhaugh, approached farmers weekly offering the land on a farm business tenancy.

"They had gone through the same process as I had," says Mr Lambkin. "The area was too small to be viable, but they had failed to secure the extra land they needed. The farm manager was also coming up for retirement, so they had to consider other options, too. They heard we were looking for extra land, and thought Sacrewell Farm would fit the bill."

John Hartwright, a consultant at Newmarket-based Laurence Gould Partnership, helped Mr Lambkin to assess the projects viability.

At first sight, given the proximity of the two units – just four miles separates the farm gates – and the general layout at Sacrewell, the move looks sensible.

"Sacrewell Farm is convenient to Easton Lodge and the field sizes, soil type, internal access roads and storage facilities will allow the unit to be farmed relatively easily," says Mr Hartwright. "It seems to fit all the criteria that John is seeking."

Soils are similar to those at Easton Lodge, but with a lower stone content. Recent cropping includes wheat, pulses, sugar beet and potatoes

"Combinable crop yields are below those at Easton Lodge," says Mr Hartwright. "Lower yielding second wheats and late drilling after beet and potatoes are the probable causes."

There is storage for 1000t of grain and 800t of potatoes, and an irrigation system allows the whole farm to be watered. "This adds to the potential of the unit, but the farms main buildings require some investment by the landlord." But, overall, Sacrewell appears to have been well managed and is in a good state of repair, says Mr Hartwright.

A closer look at the figures confirms the suitability of the unit.

The main issues to address are cropping and rotation, taking into account the huge water resource on the farm, additional labour and machinery requirements, financial returns and a suitable rent figure.

"There are basically three options to consider," says Mr Hartwright. "The first is to limit cropping to sugar beet and combinable crops, as at Easton Lodge.

"The second includes potatoes, using contractors to harvest the crop.

"The final option sub-lets the potato land to an existing grower with farmers weekly Farms contracting the irrigation."

Likely gross margin calculations (table 1) include wheat yields closer to those achieved at Easton Lodge, reflecting the increased proportion of first wheat to be grown at Sacrewell and a different approach to agronomy.

Oilseed rape and winter barley are also included at the expense of peas. "The Processors and Growers Research Organisation, which is based next to the farm, has run trial plots across the land for years, so we have decided to rest the ground. The PGRO will continue their work by taking a field a year," says Mr Lambkin.

The contract charge reflects beet harvesting and haulage, as well as the lifting of the potato crop.

Variable costs are expected to be similar to Easton Lodge, though allowance has been made for extra compound use to make up for the lack of farmyard manure at Sacrewell.

Taking the combinable crop/sugar beet option first, some capital will be needed.

A bigger tractor – a 140hp Fendt Vario – has been ordered, together with a bigger stubble cultivator. A budget of £50,000 was already in place at Easton Lodge to renew one of the ageing tractors and autumn cultivation equipment. So a further £10,000 (table 2) was pencilled in for the Sacrewell budget, reflected (along with increased wear and tear for existing machinery) in the extra depreciation charge in table 3.

The increase in contract and hire in this table reflects the need for a larger combine. "We have hired the same New Holland 8060 for the past few years, but we have had difficulty spreading straw as crop yields have grown," says Mr Lambkin. "We have moved up to an 8080 this year, but, with the new land, we shall need a TX36 or something similar."

Another full-time man will also be employed. Mr Lambkin favours a management trainee, perhaps one fresh out of college with adequate machinery experience. "I do need someone who knows how to operate a tractor and, more importantly, the machine behind it."

The salaries of the existing labour force will also have to be renegotiated to reflect the extra responsibility.

The partial budget for the combinable crops/sugar beet option (table 3) shows a pre-rent surplus of £54,730 would be generated from the new enterprise.

A proposed rent of £210/ha (£85/acre) for this cropping plan leaves a surplus of £16,930.

Option two, growing potatoes in-hand, assumes the crop is lifted and graded by contractors, with potatoes sold at or near harvest.

As well as the extra capital spend outlined in the first option, substantial sums would be needed to buy second-hand machinery to plant and irrigate the crop using regular farm staff (table 4). Again, this is shown in the depreciation charge in the partial budget (table 5), along with extra fuel and repair costs.

"An additional rent of £3600 would also be paid to reflect the inclusion of irrigated crops," says Mr Hartwright.

The overall result shows a net gain of £4620 over the combinable crops/sugar beet option. This raises the overall surplus at Sacrewell to £21,550.

But a similar result is achieved by the third option, sub-letting the land for potatoes. This assumes 30ha (74 acres) can be rented out at a commercial rate.

Less machinery would be needed, reducing the overall capital investment (table 6). "A second-hand irrigation reel and pipes would be purchased to allow regular farm staff to perform contract irrigation," says Mr Hartwright. "An average of 6in/acre would be applied at a charge of £25/acre inch."

The extra rent of £3600 payable by farmers weekly Farms for the potato land is again included, though the potential benefit of irrigating other crops, especially sugar beet, is not.

The bottom line shows a surplus, after rent, of £21,125 (table 7). Although slightly smaller than the second option, it is the favourite.

"In-hand growing of potatoes should be discounted because it offers little in the way of enhanced financial return, given the increased capital investment and exposure to risk," says Mr Hartwright.

"Of the remaining two options, I would recommend the sub-letting option because it increases the returns to farmers weekly Farms, enables an increased rent to be paid to the landlord, and justifies the purchase of an irrigator, which could be used to water other crops. Crucially, this also utilises the full-time worker at a traditionally quiet period."

Combining the two businesses in this way produces a bottom line of £30,800, or £73/ha (£29.50/acre) (see graph below). "Fixed costs at Easton Lodge totalled £504/ha. On the combined enterprise, these drop to £431/ha," says Mr Lambkin. "This, and a slightly higher gross margin, offsets the higher rent across the two farms, producing an 87% increase in net farm income."

No allowance has been made for finance charges, because of the financial arrangements of farmers weekly Farms and the regular cash contribution to the overall business by the pig unit.

But if the proposal were being considered in isolation, finance charges would arise. Under the terms of the agreement, rent is payable in advance at six-monthly intervals. This means that a years rent would have to be paid before the unit generated an income.

The cost of funding additional variable costs and other working capital over that period must also be taken into account. "This money is likely to cost about £25/ha, or £4500, depending on when crops are sold," says Mr Hartwright.

That reduces the bottom line for the favoured option – sub-letting the potato operation – to £16,625. "Clearly, this makes quite a difference, but it still leaves a reasonable gain," says Mr Lambkin. "When you add on another £10,000 or so from the Easton Lodge operation, then the overall profit looks sensible. In my view, the move would still be viable."

An agreement by farmers weekly Farms to rent the land for an overall £222/ha (£90/acre) has been accepted by the trustees of the William Scott Abbott Trust. This is marginally higher than the original figure tabled for sugar beet and combinable crops, but a clause allowing the sub-letting of potatoes justifies the figure, says Mr Lambkin.

He concedes that the trust might have got a higher rent had the tender been open to competition. "There is a huge water resource that we wont be able to use fully, although the existing set-up hasnt either," he says.

But there is potential to increase the area of let land, and to use more of the large water resource, by approaching growers of other intensive crops such as carrots and onions.

"We have agreed a five-year initial tenancy, which continues on a rolling annual basis after that. Given the low level of capital expenditure needed, and our track record at Easton Lodge, it is a relatively low-risk venture that should benefit both landlord and tenant," says Mr Lambkin.

Mr Hartwright agrees. "Improving the efficiency of the Easton Lodge operation on its own will become increasingly difficult. But there are a number of resources – management, labour and machinery – that could be profitably used over a larger area without detracting from the performance of the core unit.

"Therefore, the policy to seek to expand the farmed area is sound, and the opportunity at Sacrewell Farm fits in with this objective."

Table 1:Crop gross margins at Sacrewell

W wheat W barley OSR S beet Pots Set-aside

Yield (t/ha) 8.2 7.6 3.8 55.0 45.0 0.0

Sale price (£/t) 75.0 75.0 130.0 32.7 70.0 0.0

Area aid (£/ha) 215.0 215.0 215.0 0.0 0.0 215.0

Output 834 785.0 709.0 1,801.3 3,150.0 215.0

Variable costs (£/ha)

Fertiliser 85 42 80 75 225 0

Sprays 100 77 75 90 400 5

Seeds 30 40 20 135 550 0

Sundries 5 5 5 15 50 0

Contract 0 0 0 155 787 0

Haulage 0 0 0 360 0 0

Total 220 164 180 830 2,012 5

Gross margin 614 621 529 971 1,138 210

Table 2:Machinery spend – combinable crops and sugar beet (£)

Tractor/cultivator upgrade 10,000

Vehicle 2,500

Total 12,500

Table 3:Sacrewell partial budget – combinable crops and s beet

Additional gross margins ha £/ha Total £

Winter wheat 90.0 613.8 55,240

Winter barley 27.0 621.0 16,770

Oilseed rape 27.0 529.0 14,280

S beet 20.0 971.3 19,430

Set-aside 16.0 210.0 3,360

Total gross margin 180.0 606.0 109,080

Additionalfixedcosts (£)

Labour

Existing staff 5,000

New student 16,000 21,000

Power

Depreciation @ £50/ha 9,000

Repairs @ £45/ha 8,100

Fuel and oil @ £35/ha 6,300

Contract and hire 5,500

Electricity 750 29,650

Other

Agronomy fees 1,800

Water 250

Vermin control 400

Office 750

Building repairs 500 3,700

Total fixed costs 54,350

Pre-rent surplus 54,730

Rent @ £210/ha 37,800

Post-rent surplus 16,930

Table 5:Partial budget – in-hand potatoes (£)

Gains

30ha potato margin @ 1,137.5 34,125

Total gains 34,125

Losses

30ha combinable crop margin 16,155

Additional costs

Depreciation 4,500

Repairs 1,800

Fuel 900

Electricity 1,250

Water 1,000

Agronomy 300

Total losses 25,905

Overall gain 8,220

Additional rent premium (30ha @ £120) 3,600

Net gain 4,620

Revised post-rent surplus 21,550

Table 6:Machinery spend – sub-let potatoes (£)

Tractor/cultivator upgrade 10,000

Vehicle 2,500

Irrigator and pipes 13,500

Total 26,000

Table 7:Partial budget – sub-let potatoes (£)

Gains

30ha land rent @ £615 18,450

Irrigation charges 11,120

Total gains 29,570

Losses

30ha combinable crop margin 16,175

Additional costs

Depreciation 2,700

Repairs 900

Electricity 1,000

Water £1,000

Total losses 21,775

Overall gain 7,795

Additional rent premium (30ha @ £120) 3,600

Net gain 4,195

Revised post-rent surplus 21,125