Controlling arable production costs remains a priority

Arable costs of production have remained relatively stable over the past six months, but falling commodity values mean farmers must remain vigilant.

According to Anglia Farmers’ Agricultural Inflation Index, overall cost inflation from August 2013 to January 2014 was pegged at 0.08% – well down on the 3.31% recorded in August last year.

See also: Better outlook for arable contract farming in 2014

The costs of seed, fertiliser, machinery and fuel fell by between 2.3% and 3.5%, but contract and hire and labour both increased by about 4%. Agrochemicals remained relatively static, at 0.3%.

Agricultural Inflation Index

AgInflation %

RPI inflation %

RPI (sourced from ONS)

Overall agricultural inflation Aug 13 to Jan 14

-0.8

0.5

Cereals and OSR

0.32

3.2

Bread and margarine

Potatoes

-2.7

7.6

Potatoes old white and loose new

Sugar beet

-0.6

-6.5

Granulated sugar

Source: Anglia Farmers

The figures are based on information from the group’s buying office, which has a sourcing power of more than £250m. Costs are noted when they are incurred rather than when the inputs are used, and reflect prudent purchasing practice such as buying in advance.

Each sector has, of course, fared differently, with overall costs of producing sugar beet falling by 0.6% and potatoes dropping by 2.73%. Bucking the downward trend, costs of production for cereals increased by 0.32%, said the report.

At the other end of the gross margin equation are commodity prices – and between August and January, farmers received the lowest ever sugar beet price a tonne in real terms, it added.

In the year to February, spot wheat prices slumped by about £50/t, with oilseed rape down by about £100/t and potatoes losing close to £90/t. In percentage terms, that’s a drop of roughly 25% for oilseed rape and wheat, and 38% for potatoes.

It’s clear, then, that farmers will struggle to maintain gross margins in the year ahead.

“Harvest 2014 values are not exciting, so once again we’re back to careful focus on cost control,” says Ian Ashbridge, farm business consultant at Bidwells. But, as always, there is balance to be found between cutting costs and maximising productivity.

“After the warm and wet winter we’ve had, it will be important to have a very robust spring fungicide treatment, as there’s plenty of rust and septoria out there,” says Mr Ashbridge.

Two wet seasons mean many fields are suffering from compaction, which won’t have been alleviated by frosts over the winter, so farmers should be realistic about yield prospects when creating budgets, he adds. “Oilseed rape and root crops, such as sugar beet and potatoes, will be particularly susceptible.”

Anyone planning to sow spring crops should be patient and wait for soils to dry out sufficiently before carrying out fieldwork. “With spring crops it is even more important to have a good, fine seed-bed – it really is a false economy to rush spring crops into less than ideal conditions,” he says.

Alleviating soil problems, and maintaining drainage ditches, are likely to add to farmers’ fixed costs over the coming year, he warns.

Ag Inflation by Input

Input

Inflation of item group %

Index Oct 2006 = 100

Seed

-3.5

160

Fertiliser

-2.3

204

Agrochemicals

0.3

123

Contract and hire

4.0

129

Machinery inc depreciation

-2.5

170

Fuel

-2.3

199

Labour

4.1

125

Rent, interest, property, office

0.5

137

Animal feed and medicine

-0.8

221

Source: Anglia Farmers

And nitrogen fertiliser usage may also rise this spring. “It will be worth sampling soils, as you can expect soil nitrogen levels to be quite low due to leaching after all this rain.”

But with the lower grain prices, nitrogen management will be critical. “Applying nitrogen fertiliser is an investment, but you need to plan it carefully to reach a financial optimum,” he says. “It’s very easy to become used to simply applying a fixed amount of fertiliser, so you may need to reassess that.”

Often, controlling fixed costs is actually easier than slashing variable costs, adds Mr Ashbridge. So farmers should consider all their expenditure – such as insurance, energy costs, fuel, administration and finance, to ensure they are the getting best deal.

“Be prepared that over the next two years interest rates are likely rise. It may not be a sharp jump, but the costs of servicing debt will most likely increase,” he says.

“Given the incremental increases in variable and fixed costs over the next couple of years, farmers will need even more working capital, which is likely to result in higher – and more expensive – borrowings.”

Keeping an eye on the market will be equally important. “The recent bounce in grain and rapeseed prices provided a selling opportunity for anyone with old crop cereals left to move,” says Mr Ashbridge. “New crop markets are now just waiting for some news on weather effects around the world – for now, most crops are looking pretty good.”

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