5 September 1997

NOT ALL DOOM AND GLOOM COME 2001…

Tumbling grain prices, a strong pound and cuts in support under the EUs Agenda 2000 proposals all suggest a gloomy future for arable farming. But just how gloomy is that future likely to be? Charles Abel sought some expert advice

WHAT goes around comes around. And so it is with currency bonanzas. For four years sterlings weak showing against other European currencies ensured high grain prices and healthy support payments. Now the strong pound has turned that all on its head.

The cushion that the currency markets gave UK arable farmers over the past four years is now going to be needed as the same currency forces drive profits down to post-Agenda 2000 levels three years earlier than expected.

Projected budgets for the RASE/Andersons model 485ha (1200-acre) brash farm in Lincolnshire show that impact (see table). Similar calculations can be made for readers farms. At the Cereals event earlier this year farm business consultants Andersons budgeted a £175,000 surplus for the brash farm model, before rent, finance, drawings and tax.

Taking account of the slide in grain prices resulting from sterlings strengthened position in early August and that surplus dwindles to £131,000 – barely £270/ha (£109/acre) to pay for rent, finance and tax. "That doesnt leave much for personal drawings," notes adviser Francis Mordaunt.

Many producers may think the EUs Agenda 2000 proposals will take profitability still lower. It may, agrees Mr Mordaunt, but not a lot. His estimates suggest a further loss of about £6000, leaving just £125,000 surplus. The message is clear – the pounds new found strength is pushing profitability close to Agenda 2000 levels three years early.

"Of course these figures are based on a lot of assumptions – about world grain markets and currency movements in particular. I have assumed grain prices will be no lower than now, even though a lower cereal intervention price of £65-69/t is planned.

"I have assumed that the pound will stay at about its current level (ie 2.90DM/£ and 1.60US$/£) and that world wheat prices will stay at about 140US$ for soft wheat. At these levels of currency there is no need to budget for a further fall in grain prices and if the pound weakens the prices will rise. However, if the UK joins the European Monetary Union the 2000 prices will depend upon the values at which we enter."

Other factors could distort the picture further. The application of some form of modulation or aid capping has been much discussed. Initial rumours suggested 150ha of cereals, but more recent signals suggest a total sum of money – 240,000ecu has been mooted. That would equate to 600ha of cereals. "That seems far more likely," says Mr Mordaunt.

His best guess for now is that a maximum sum per farm will be allocated to EU countries. How those countries distribute the money may be left to local decisions. "There could be no modulation. The entire sum could be divided equally amongst growers, perhaps with some form of environmental demands attached.

"One thing is reassuring and that is that farm minister Jack Cunningham has got the efficiency message. He knows that if we are to compete on world markets our most efficient businesses must not be unnecessarily disadvantaged."

Furthermore, many EU ministers are likely to call for the gap been price cuts and compensation payments to be reduced. It currently stands at 50% – that is to say growers are only compensated for half the cut in intervention prices. However, the initial leaked document indicated a 100% compensation, Mr Mordaunt notes.

"We can speculate whether the current 50% is firm or a negotiating position. The UK, Denmark and Sweden have already made it clear they want budget cuts. But Germany and probably France too will be looking to close the gap to protect their producers."

Significantly, set-aside will not be abolished, merely reduced to a 0% level. "That leaves the option to increase it at a later date if grain production gets out of hand," Mr Mordaunt notes.

Although penalty set-aside will end, voluntary set-aside will remain an option. "That will be useful for people with poor land which is eligible. It could be worth their while leaving that in set-aside, particularly while grain prices are low."

On the downside Agenda 2000 contains an unclear clause about cutting compensation if the world grain price rises. That is designed to avoid a repetition of recent years when growers have been compensated for price cuts which did not materialise – because of stronger world markets, notes Mr Mordaunt. However, the detail of that adjustment has not been hinted at.

Furthermore, the proposals may not meet the agreement of the US and Cairns groups in the next round of world trade talks, due to start in 1999. "They will be looking for a complete decoupling of aid payments from production after the end of the current WTO peace clause which expires in 2003.

"Agenda 2000 may be a move by the EU to go some way to meeting that demand, so further talks could then achieve decoupling, but further down the line. Whatever the situation Agenda 2000 should only be seen as a transitional measure on the road to complete decoupling of payments," Mr Mordaunt comments.

So, while the future is not bright, it isnt as dark as it could be. Indeed, improvements in genetic yield, improved inputs, better crop husbandry and enhanced marketing should all help offset potential cuts in profitability.

Add to that changes in overhead management and business structures and the potential for UK arable farm businesses to reap healthy profits in future is far from over, he concludes.


FALLING FARM PROFITS

YieldCrop values £/t

t/ha96/97 bdgt96/97 bdgt2001

Cereals 97August 97bdgt

wheat6.8998989

barley5.71188585

osr3.1170135135

linseed2.2165135135

peas3.7132100100

surplus-175,000131,000125,000

Assumptions: 1200 acre farm on brash soils in Lincs, all debts cleared, owner occupier growing wheat (25% milling), winter malting barley, winter rape, peas and linseed. 5% set-aside in 96/7, but 0% in 2000. Grain marketed through year. No changes to management, input use or yield.

ARABLE FUTURE

&#8226 Currency changes have cut profits to Agenda 2000 levels already.

&#8226 Price cuts not fully compensated – but EU members dont all agree.

&#8226 Modulation unlikely.

&#8226 Scope for area aid scale back if world prices rise.

&#8226 Rotational changes minor.