28 May 1999

LOAMFARMFACESFUTURE

What is the future of combinable crop farming in the UK?

That is a question most farmers attending Cereals 99 will

be asking. In this article, Francis Mordaunt of Andersons,

the farm business consultants, takes a realistic look into

the future, using the familiar Loam Farm business model

ARABLE farming is undergoing a huge transition, leading to pressures on profitability that are greater than they have been for some time. Adding to their headaches is profound uncertainty about the future for the sector.

But there is hope for the future. Despite all the conflicting messages bearing down on growers careful analysis of budgets shows the future is not doom and gloom alone.

Indeed, prospects for arable farm profits could improve slightly. But much depends on factors outside the control of growers. Forecasts for the 243ha (600 acres) Loam Farm, which has been a feature of the Farm Business Centre at Cereals since 1991, clearly show that.

Like most growers the three main uncertainties facing Loam Farm are CAP Policy; exchange rate; and world prices.

The policy uncertainty is now almost over, with the Agenda 2000 agreement mapping out the next three years until 2002. Some important decisions still have to be made by UK agriculture ministers. For arable farming, the important ones are:

&#8226 Whether to retain or abolish the maize separate base area;

&#8226 Where to set the maximum level of voluntary set-aside;

&#8226 What environmental "cross-compliance" conditions to set;

&#8226 Whether to modulate farmers direct payment or not?

Of these, only the maize separate base issue is likely to have a direct financial impact on Loam Farm. Abolition of the separate base area would increase scale back of all arable aid payments by about 1.5%, but increase payments to maize growers to the full cereal rate.

A far greater effect is likely to stem from the exchange rate of the k against the £. The value of the k to UK farmers has fallen by nearly 8% since Jan 4 when the k was born at 71p. Now it is worth just over 65p.

That currency movement has already reduced the value of intervention grain by over £5/t, despite the monthly increments reflecting storage.

Area payments for 1999 are reasonably well protected at last years "frozen" exchange rate of 75.5p. But claims in 2000 and 2001 will be paid on the basis of the exchange rate at July 1 each year (or possibly the average over June if current Commission proposals are agreed).

There will be some additional compensation in those years. But that will be based entirely on the cropping that was claimed in 1999, so will not be available to those taking on additional areas after this year.

An exchange rate of 67p for the next two or three years now looks entirely possible as the UK economy strengthens again whilst the German and main k zone economies remain weak. Being more optimistic there could be a slow weakening of the pound to increase the k rate to 72p by 2002.

World prices of most commodities are not expected to strengthen in the short term, with the possible exception of wheat. Low world plantings in 1999 will result in a reduction of stocks and so higher prices may materialise in the EU after the 1999/2000 marketing year. But that also assumes that intervention stocks reduce rather than rise again after the next harvest.

Budgets to demonstrate the effects of these changes have been prepared for the four years to 2002 for Loam Farm, using a range of assumptions. Key among these is that the crop rotation will change to increase the wheat area from 43% (all first wheats) to 50% including a second wheat. Protein crops will be reduced in area.

The other main output assumptions on exchange rate, prices and area aid are set out in the table.

Profits for the whole period 1991-2002 are shown in the first graph. They highlight the peak of 1995 at £111,000, and the steep collapse of profitability in 1997 and 1998 to just over £40,000.

Budgeted profit shows a slight recovery after 1999, but only on the basis of good fixed cost control, including reduced machinery depreciation. But that slide in depreciation, which stems from low investment in recent years, is a policy that cannot go on forever.

It must also be explained that the profit of £41,000 in 1991 was after interest charges, or rental equivalent, of £118/ha (£48/ acre).

By 1998, following the high profit years, borrowing was almost eliminated so profit is really a pre-rent and finance surplus. The second bars in the chart for 1998 onwards show profit after deduction of a £118/ha (£48/acre) rent equivalent to allow more accurate comparison with 1991.

A more pessimistic view of the future is shown in the second graph. Here the exchange rate is assumed to stay at 67p for the next three years and world prices to remain depressed.

With lower intervention support as a result of Agenda 2000, feed wheat at £70/t has been assumed, with proteins at the same price. In theory it could fall even lower.

The second graph shows profits after allowing for a rent equivalent almost disappear and with farmers drawings still to be deducted the business would clearly be forced to change.

The model farm is of course an artificial situation. But it does illustrate that a prudent owner-occupier who has banked his profits in the good years is in a strong position to survive without being forced into change, although clearly some additional land at the right price is what is needed.

A tenant on the other hand, especially if paying a more realistic £148-198/ha (£60-80/acre) rent would already have had to make changes, either finding alternative part-time employment or paying off the permanent staff member and using more contract and casual labour.

If the next few years follows the more pessimistic assumptions then all businesses will find it tough going. Any with high rents and/or financial charges will find it very difficult to make any profit at all. &#42