14 June 1996

Slide forecast in arable profit

By Robert Harris

ARABLE profits will decline from now to the end of the decade, according to NFU senior economist, Sion Roberts.

"In 1995 we had high yields, high prices, and area payments were up. Gross margins were at their highest level since our records began," he told a pre-Cereals 96 conference organised by the Plunkett Foundation.

Over the next three or four years, declining prices and rising variable costs will erode that peak, he believes, by as much as 35%. "I have assumed the 1995 wheat price of £118/t for this year, then down to £110/t for the next two years. It is quite possible that could come down a lot quicker if the world price falls."

That is very likely, Mr Roberts stresses. Although the world price has rocketed (to over $200/t) in the last 12 months, it is only repeating a cyclical pattern. Average prices have hovered around $145/t for the last 20 years.

Long term, that is unlikely to change, he says. Constantly rising world grain yields and higher plantings in response to current price levels could see world production rise by nearly 25% to 652mt by 2000. That easily offsets bull factors like an expected 25m tonne increase in demand from the Far East and will drive prices down.

Input costs are increasing by 7.5% a year, but he has used smaller increases for the future. "I havent kept that level to the end of the period. Putting all that together, at what I think are fairly bullish prices, and not over-the-top increases in inputs and a 3% fall a year in arable area payments, the gross margin declines quite quickly from £955/ha in 1995 down to £800/ha for 1998."

When rising fixed costs are taken into account, net margins fall from £557/ha (£225/acre) to about £360/ha (£146/acre).

Although still a long way above the late 1980s levels, it represents a "dramatic drop" from current levels, Mr Roberts warns.