Profitability and volatility for a long while yet

Combinable crop profits may have picked up in the past couple of years, but no arable business can rely on them staying there. Robert Harris reports.


Population growth, climate change and food security are all partly responsible for the feelgood factor that has returned to arable farming over the past couple of years. And all three will play key roles in underpinning commodity prices in the longer term.


However, on a seasonal basis, big swings in cereals and oilseed prices are likely to remain a fact of agricultural business life. In turn, these are likely to influence crop input prices, leading to greater volatility, against a backdrop of continually rising fixed costs, says Paul White, partner at agricultural business consultant Brown & Co.


“We are also facing another round of CAP reform which will be implemented in the next two or three years. There is no doubt that this will have a negative impact on the Single Payment Scheme, because of budget pressure, re-chanelling of support to other measures, and increased subsidy being directed towards newer member states in eastern Europe.


“Not many arable businesses in the UK can stand alone without the single farm payment, and any reduction will come straight off the bottom line.”


No business can afford to drop its guard, he maintains. “Everyone talks about commodity price volatility, but put all the above factors together and it is clear that farm profitability could be heading for an even bigger roller-coaster ride over the next few years.


“By definition, that means we have to assume that at some point profitability is likely to fall again, and growers need to ensure they can weather these periods in between better times.”


A regular check on their business’s financial health is vital. “With time at a premium on most farms, analysis of key farm data often gets overlooked. It is a false economy,” he warns.


The first step of any review should be an in-depth look at the figures. Farm accounts should be professionally drawn up, computerised and available quickly after the year-end. This saves time during a review, but more importantly it allows management decisions to be based on reliable and up-to-date information.


“Even some of the best farmers are not that familiar with finding their way around the accounts. Farmers need to understand them and all aspects of farm finances better, including budgets and cash flows – if you can’t measure it, you can’t manage it.”


Assessing output is important. Maximising yield and quality, whether through more effective use of inputs or adjustments to cropping or rotation, is important, as is effective marketing and risk management. “The latter can make a big difference to the bottom line, especially when prices can move by 100% over a season.”


However, a thorough understanding of the business’s cost structure is arguably the most important aspect of any review, he notes. Cost of production has soared in the past few years, so regardless of what the market is doing, controlling costs is still “hugely significant” when it comes to delivering better profits, season after season, says Mr White.


chart1Input costs have risen 76% in two decades, according to Nix Farm Management Pocketbook figures (see graph, left). “Most of that increase has happened in the past five years,” says Mr White. “In that time spray costs have risen 30% and fertiliser prices 100%.”


While input costs can be shaved, any negative effect on output through reducing rates or using less effective chemistry must be considered carefully. Forming or joining an input-buying group, or timely purchasing, can be more effective ways of lowering spray and fertiliser bills, he says.


Fixed costs offer much more opportunity to save money, Mr White believes, particularly those associated with power and machinery and labour, both of which have rocketed in recent years.


Despite that, top-performing arable growers are managing to keep machinery and labour costs below £300/ha. The rest are spending much more, with the bottom quartile averaging £407/ha (see graph, right).


chart2


“That is a huge difference,” says Mr White. “Unless growers can identify their true costs of production, they may not even be aware of it. Many farmers do not have the right management systems in place or the information to hand, or if they do, they are not sure how to make the most of it.”


The challenge then is what to do about it. “Growers should not try to match these best figures, they should adopt a clear plan to try to beat them – after all, the top 25% won’t be sitting on their laurels.”


The top quartile often, but not always, operates on a larger scale, Mr White notes. “There might be opportunities to co-operate with neighbours – you don’t necessarily have to grow the business itself.


“And the best businesses don’t replace equipment too often, striking a balance between depreciation charges and spares and repairs. They are also embracing technology, such as satellite guidance, to improve output from the same capital and operational expenditure.”


Smarter cultivation systems can also save time, metal and fuel in crop establishment, preserve organic matter and improve soils. “However, some min-till systems are anything but – max till is not always cheaper or better than ploughing,” Mr White warns.


chart3This sort of shrewd management is helping the top 25% of Brown & Co clients to contain costs. On average they are spending £902/ha to grow a crop of feed wheat (see graph, left), £877/ha on oilseed rape, £729/ha for beans and £1,338/ha to produce a crop of sugar beet. This includes all direct and a proportion of all indirect business costs.


“To match or even beat those sorts of figures growers need to spend a good deal of their management time appraising their current business performance,” he says.


“Whether they choose to do it on their own, or employ a fresh pair of experienced eyes with no emotional attachment, is up to them. But do it they must if they are to have any chance of protecting or improving farm profitability.”

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