To a company like Velcourt – and any arable outfit that relies on farming other people’s land for a living – the unprecedented cereal and oilseed price rises are something of a mixed blessing.
The extra income is hugely welcome, boosting profits and allowing much-needed investment on many units. On the other hand, it has slowed the flow of land available for such third-party farming ventures. Some farmers who might have been about to strike an agreement are continuing to plough their own furrows.
But James Townshend, Velcourt’s chief executive, believes it is only a matter of time before his company, which farms about 53,000 mostly arable hectares in the UK, and other entrepreneurial producers who want to develop their businesses without the huge overheads of land ownership, start expanding again.
“It’s a reasonable assumption that structural change will slow, but that people will start addressing it again in two or three years’ time. I don’t think farmers can afford to believe that things have changed permanently for the better.”
The rising cost of inputs, especially those based on fossil fuels, is already being felt, and there is no relief in sight. Rent and rent equivalents are also climbing.
Grain and oilseed prices, while looking buoyant for the next couple of years, are vulnerable to increased global plantings and more intensive husbandry. As Mr Townshend puts it: “The best cure for high prices is high prices.”
Effect of input price rises on margin (£/ha)
Spring malting barley
First winter wheat
Winter oilseed rape
Second winter wheat
Assumes N up to £250/t, P + K up £20/ha, agchems up 5%, output prices unchanged.
There is also the question of dwindling farm support. “The SFP made up such a significant part of farmers’ income it blurred efficiency and compensated mediocrity,” says Mr Townshend. “Now farmers will have to rely increasingly on their commercial and technical skills.”
There is no doubt that UK farmers face unprecedented volatility. “But volatility creates opportunities for profitable arable businesses, those that are able to manage that risk.”
He dismisses the suggestion that Velcourt’s size creates an immediate advantage, insisting that any well-managed arable businesses can, by following a similar approach, enjoy similar opportunities.
Velcourt, he says, consists of at least 40 smaller businesses, each of which has to be profitable. “It’s about being able to do things better, rather than simply relying on economies of scale.”
The firm needs to deliver consistent top-quartile returns to clients and shareholders, so cannot afford to live off depreciation for a year or two until things improve. “We have no freehold land on our balance sheet, no protected tenancies like companies in most other sectors in the UK economy, we survive on our ability to deliver results.
“We are constantly looking for new ways to do the things we need to do. We are leaner and more efficient as a result of the past few years. We have always focused on the resources that agriculture needs, particularly people and technology, if it is going to be successful and competitive.”
People are an often under-valued asset, but not at Velcourt, says Mr Townshend. “We have to continue to invest in things that make the business more efficient, and that means people – let’s not underestimate their contribution. Our ethos has been to empower staff so they can make well informed decisions for themselves.”
Good marketing is another vital component in any arable success story. In 1999, Velcourt set up an agreement with Centaur Grain to market most of its annual 240,000t output of combinable crop produce.
“It helps us develop an individual farm-marketing strategy and to manage risk inherent in today’s grain markets. We need to plan our cropping in relation to likely markets we need to be able to use derivatives and sell forward direct to consumers.
“We cannot afford to put all our money on red or black, nor, I believe, can any farmer. Were we to operate on our own we would only be as good as our own trader, and that would be high-risk.”
Securing the right resources at the right time at the right price is also paramount. Velcourt has struck up several long-standing relationships with key suppliers for example, sourcing most of its powered machinery through Case for the past 20 years, and it is establishing similar arrangements with agchem suppliers.
But it is not all about price, he insists. “It’s not in anyone’s long-term interest to beat suppliers over the head. We’re trying to develop partnerships to secure the right products on the right terms at the right time.”
Arable businesses will need to become more flexible to cope with increasing volatility. As well as marketing and input sourcing, cropping is another key area for attention. Commodity prices are an obvious factor when planning rotations, but input price rises are also now having a big effect on margins, as shown by projected figures comparing harvest 2007 and 2008 drawn up by Velcourt at the start of this year (see table above).
“Of course, there are various constraints to changing rotations, such as fixed costs, good husbandry and timeliness, but we need to open our eyes to the impact of all these changes on our businesses,” says Mr Townshend.
The environment is becoming increasingly important, too. “As arable farmers we have a real responsibility for UK land. We take that very seriously.
“The consumer increasingly expects us to be good stewards of the land. Clearly, there are things we can do which will have a material benefit on biodiversity generally, on CO2, methane and other emissions. All of this will require thought, management and investment.”
He believes there will be an eventual return on that investment if the industry can persuade consumers of its environmental credentials, and that UK-sourced food has the integrity they expect. “I think there is considerable scope for us to capture value from UK consumers at the expense of our competitors overseas,” he says.
Arable farmers face new challenges, and he believes climate change is the wildest card in the pack. But he reckons the opportunities outweigh the threats, in the UK at least.
“Although the UK biofuels industry seems, for the moment anyway, to have fallen by the wayside, there is a whole string of new technologies – for example, anaerobic digestion, second generation biomass production, wind farms – that farmers can use. We are putting a lot of effort into this.
“There are opportunities around the food industries’ carbon footprint, an issue that is going to really occupy minds. If we can demonstrate we are producing the raw material the food industry needs in a responsible way, that’s a powerful marketing message.”
Mr Townshend admits he is pretty upbeat about prospects over the next decade. Continued rationalisation will mean fewer, larger businesses, but they will need top quality management and staff. As he puts it: “We see ourselves being an important part of that process, alongside many others.”
- Formed in 1967 by three farmers
- Manages rural businesses for landowners, tenants, working farmers and institutional investors
- Farms about 53,000ha in the UK
- Tailored agreements include three-year strategic plan detailed annual budget detailed regular performance monitoring
- Supplies 40% of working capital on average
- Farm management agreements
- Contract farming agreements
- Farm business tenancies
- Agronomy service over 20,000ha
- Owned by members of current executive and initial founders
Velcourt at Cereals
At this year’s Cereals event, Velcourt sets out to answer one question constantly asked by visitors: “What are you doing on your own farms?” A model farm will mirror cropping, agronomy and cost structure of commercial units and include details of budgets and power and machinery needs.
The familiar research area returns, examining some of the projects undertaken by Velcourt’s R&D team.