19 June 1998

Still room for trimming costs, producers told

By Robert Harris

MANY farmers who believe they have cut costs to the bone will need to take more radical steps if their farms are to remain viable.

A healthy business should aim to produce a gross margin which equates to 70% of the output value of the crop, says David Bolton of farm business consultants Andersons. "No more than 30% should be spent on variable costs."

Labour and power

Manageable fixed costs like labour, power and general overheads should be kept to 40% of output value. Rent and finance should take no more than 15%, leaving a similar amount as profit.

To reach those targets, most farmers still have room to trim labour and machinery costs. "There are still many small farms in East Anglia which own a combine, yet the capital cost is crucifying. The attitude of farmers that they need to be in control during a catchy harvest no longer adds up. They can safeguard themselves by ensuring access to a much bigger machine which will clear their area faster," says Mr Bolton.

For some, a more radical restructure will be needed to unlock capital and reduce machinery and labour needs, he believes. But tax implications must be assessed carefully before deciding which route to take.

Farm business tenancies provide a secure income, he points out. However, future landlords considering this option must weigh up the loss of working farmer status against that security.

"Such a landlord is disadvantaged under capital tax rules," says Mr Bolton. "He also faces potential problems with VAT and income tax."

Apart from agricultural property relief, all capital tax benefits are lost. Income tax treatment shifts to schedule A, so a landlord cannot bring tax losses forward to reduce high tax bills in profitable years. And he can no longer reclaim VAT on expenses.

Contract farming agreements could be a better bet for many, Mr Bolton advises. By employing a contractor – often a neighbour – to carry out all operations, the landowner receives most income at a basic return and some share of the profit. Although less secure than FBT income, the farmer is considered to be risk-taking farmer and qualifies for all agricultural benefits.

More active role

A landowner who wants a more active role may choose a share farming agreement, where he retains a share of the produce of the business, which exposes him to financial risk. He also provides much capital. Consequently, he also retains agricultural tax reliefs.

Further costings messages from Cereals 98 on page 65.