13 October 1995

Profits rise again, but control of costs has slipped

By Philip Clarke

ARABLE farmers have enjoyed another year of rising profits but are in danger of losing their grip on costs.

Latest figures released by accountants Touche in Agricul-ture, based on 46 combinable crop farms covering 17,000ha (42,000 acres), show that average net farm incomes increased by 14% to £215/ha (£87/acre) in 1994.

This reflected a fortuitous combination of static prices and rising aid payments. Average support (including set-aside payments and cereal, oilseed and pulse area aid) came to £205/ha (£83/acre).

But within the sample there was also evidence of a significant rise in overhead costs. In particular there was a 44% increase in property repairs, an 18% rise in rents and 15% higher depreciation.

Some of this increase was tax driven (as farmers brought forward their costs in order to benefit from the "averaging" provisions in the transition to the current year basis of taxation). But there was also cause for concern.

"Sprays and fertilisers have risen largely due to shifting exchange rates," said senior agriculture partner Vincent Hedley Lewis. "But in other areas there is a suggestion that farmers are not paying such close attention to their costs.

"It may be that deals on machinery are not as competitive as a few years ago. Also, renewed confidence in the industry and the banks willingness to lend has led to a sharp rise in lending for land purchase. This will reflect in higher finance charges in the future. It is important borrowers ensure they have the means to service loans if, for some reason, area aid is removed in five years time."

As such, the target should be to achieve costs below world prices.

Costs above world prices

But, at £116/t before drawings, the bottom 25% in the sample had costs way above world prices in 1994 and only the area aid cheque kept them in profit. "These producers must either improve their performance or get out," said senior manager David Turner.

Anticipating a gradual decline in area aid payments in the years ahead, Mr Turner said it may soon be economic for some farmers to opt out of the CAP altogether. At current world market prices (£120/t fob) it would not take much of a cut in support for some to be better off by bringing their set-aside land back into production and foregoing the area aid.