16 October 1998

Producer profits to fall by further 50%

By Philip Clarke

PROFITS on cereal and dairy farms are expected to halve again this year, following two years of steep declines, pushing more businesses to the point of bankruptcy.

New figures from accountants Deloitte and Touche show that, in the year to June 30, 1998 – covering harvest 1997 – average net farm incomes fell 56% to just £123/ha (£50/acre).

At this level, farm incomes are now slightly less than they were nine years ago, when Deloitte and Touche started monitoring its clients accounts, and thats before allowing for inflation.

But for harvest year 1998, the company is anticipating average profit levels of just £64/ha (£26/acre) – a drop of 48%.

This assumes a further fall in the average prices of wheat and milk, offset by some reduction in variable costs. (See table)

For a 200ha (500 acre) unit, that implies an income of less than £13,000 from which to make personal drawings, pay the tax man and fund any reinvestment.

Against this background, agricultural partner, Vincent Hedley Lewis says farmers need to continue attacking the major costs, in particular labour, power and machinery.

They should also look at their cropping plans. Going for the highest gross margin crops is not always the best policy. For example, including barley in the rotation could help spread harvest and mean a farmer needs run just one combine instead of two.

Farmers should also look at ways of co-operating more with their neighbours, even to the extent of merging their businesses. "Significant savings are possible by merging," says Mr Hedley Lewis. Labour and machinery could both be shed, while the enlarged business would have more clout in the market place. They should also discuss their problems with their families and advisors.

But looking further ahead, there is some room for optimism. Average world wheat prices over the past 15 years have been $135/t (£80/t) compared with todays value of about $100/t (£58/t). Mr Hedley Lewis sees no reason why $135/t (£80/t) should not be the going rate again.

"Weve just had two of the best world harvests for years leading to surpluses. And there are big problems in the Pacific rim, where people had wanted to change from eating rice to eating meat and could afford to do it. I do not believe that has gone for ever."

Scientific improvements also present big opportunities to boost yields and so cut costs per tonne, but only if farmers are allowed to use the new technologies.

Trends in net farm income (£/ha)

1996/97 1997/98 (change) 1998/99* (change)

Combinable crops 302 129 (-57%) 71 (-45%)

Potatoes and other roots 160 72 (-55%) 64 (-11%)

Dairy and arable 301 165 (-45%) 95 (-42%)

National average 278 123 (-56%) 64 (-48%)

* Forecast based on following assumptions:Wheat price falls from £85/t to £78/t; wheat yields increase 10% but other crop yields fall 15%; milk price falls from 23p/litre to 20p/litre; milk yields increase 5%; arable variable costs fall 8%; milk variable costs fall 12%; labour costs increase 3%; power and machinery costs remain unchanged; property costs fall 20%; finance charges increase 20%; rent remains unchanged.