Prepare for a future of lower subsidies

Farmers have been urged to make the most of the existing CAP support system to prepare their businesses for a future of lower subsidies.

Pressure on the EU budget could see the amount of money available through the reformed CAP reduced by more than 12-15%, a far deeper cut than the 4-5% proposed, Andersons’ Richard King told a seminar near Bury St Edmunds in Suffolk on Thursday (1 March).

“Money is the big driver of this round of CAP reform. Many elements of the proposals such as capping and greening are designed to make farm policy more acceptable to the EU public. But there is still likely to be lower funding in the next budget period from 2014 to 2020.”

While it was difficult to say what the payment rates would be under the reformed CAP, latest estimates suggested the net payment to a lowland English farmer could drop by 13% between 2012 and 2015 at current prices, although in real terms the loss would be greater, he said. Farmers in Scotland and Wales could see an even more dramatic reduction as payments moved from the historic to a flat-rate basis, he added.

Smaller traditional family-run mixed farms were likely to be hardest hit by the cuts, as many relied on subsidy payments to get anywhere near making a profit, even with improved prices and a relatively firm outlook, Mr King continued.

The firm’s notional 154ha mixed lowland farm was forecast to make a business surplus of £128/ha in 2012-13, although this turned into a £127/ha loss without single payment and stewardship money. “Many of these ‘unreconstructed’ businesses are doing a bit of everything, but nothing at any scale. They typically have high overheads and will be hit hard by a cut in subsidy.”

While prices were improved, costs had also risen and shifted the breakeven higher, Andersons colleague Graham Redman said. UK farm business performance had improved over the last five years, but more had to be done as many were still underperforming and the gap between best and worst was growing.

Analysis of the firm’s model 600ha arable farm illustrated this difference. Under the management of a “top fifth” operator, cost of production was reduced from £122/t to £106/t, whereas costs rose to £166/t under management of a bottom 20% farmer. The top farmer achieved substantially higher yields than the worst – 9.5t/ha compared with 6.9t/ha – while also spending less on virtually all cost categories per hectare.

Getting your business in shape

• Calculate cost of production for different enterprises – use for business management

• Can use COP as a guide as to when to sell and “lock in” a profit, but don’t rely on COP for all selling decisions

• Monitor performance – tight cost control and attention to detail

• Follow markets closely, but concentrate on the things you can control

• Ensure capital employed is appropriate to the scale of output

• Make sure future rental agreements factor in likely falls in subsidy income and lower farm profitability due to rising costs

• Maximising yield still key to reducing cost of production

• Consider how to make the most of all resources on the farm – food, power generation, other activities