Arable margins set to fall as cost of production rises

Combinable crop margins are set to fall by more than £80/ha for both the 2018 and 2019 harvests after the improvement seen in 2017 crop results, says consultant Andersons.

Lower yields, following the late wet spring this year, alongside higher machinery depreciation and fertiliser costs are among the main reasons for trimming expectations.

 This has reduced business margins, after all costs including rent, finance and private drawings, to £221/ha for both years.

This compares with £305/ha in the 2017 crop year, the best result since 2012 and one that was helped by another rise in BPS.

The 2018 and 2019 figures mean that if it were not for BPS support, the farm would only just break even after taking account of all costs, including drawings of £79,000 for the family partnership.

Since the budgets were compiled in May, the new season nitrogen market for 2019 crops has kicked off at £15-£28/t above the figure used by Andersons.

“Combinable crop margins are tight and may well get tighter,” says Nick Dee, a partner at accountant Hazlewoods.

“Costs continue to increase. While old kit has held value well, new kit is more expensive again.

“Insurance is a big cost. More people are looking for alternative quotes, but need to be smart as there are only a limited number of underwriters and different brokers may be approaching the same underwriters.”

Mr Dee sees profitable businesses considering switching to company status but warns this needs a careful approach in terms of how cash will be used in the company – if it is all extracted then there is no real saving.

Advice for arable businesses

  • High yields cut costs of production a tonne but the optimal level is not always the highest yield.
  • Lower output from lower input use or a more sustainable rotation is often a worthwhile trade-off.
  • Consider not cropping lower yield-potential areas but beware knock-on increases in fixed costs, so examine business structure to see if this can be addressed.
  • More effort needs to go into efficient deployment of labour and machinery.
  • More realistic assessment is needed of what is economically-sound rent, with support changes and long-term husbandry in mind.
  • Review insurance – get quotes from wide range of underwriters.

Crop outlook

UK wheat prices would be £15-£20/t lower were it not for the continued weakness of sterling, says Andersons head of business research Richard King.

That weakness is one of the potential upsides for 2018 harvest prices.

However, the UK will also draw in imports if the UK produces another relatively small wheat crop.

Current expectations from a smaller area are for a 14m-tonnes plus crop, compared with almost 15.2m last year.

This week futures prices were boosted by the US Department of Agriculture cutting its forecast for Russian wheat crop by 3.5m tonnes to 68.5m tonnes, following dry weather after a wet spring.

This would mean a 19% drop in Russian wheat production compared with the 2017-18 crop.

European wheat production for harvest 2018 was also revised down by 1m tonnes to 149.4m tonnes, 1% lower than in 2017.

UK ex-farm prices rose by another £1/t midweek compared with the previous week, with spot feed wheat averaging £159/t ex-farm and new crop £153.40.

Model farm

Andersons’ Loam Farm model, a 600ha combinable crop unit, made a business margin of £305/ha from the 2017 crop year, the best for five years.

However, the improvement was largely due to external factors such as the weakness of sterling rather than the fundamental strength of farm businesses.

Higher grain prices and lower fertiliser costs were two of the main factors.

Loam Farm model margins to fall in 2018 and 2019

 

Harvest years

£/ha

2016 (result)

2017 (result)

2018 (estimate)

2019 (forecast)

Output

1,061

1,205

1,147

1,187

Variable costs

421

395

403

427

Gross margin

640

810

744

760

Overhead costs

394

413

421

441

Rent and finance

242

243

242

240

Drawings

77

77

79

79

Margin from production

(73)

77

2

0

Basic payment

213

228

219

221

Business margin

140

305

221

221

(600ha combinable crops – milling wheat, oilseed rape, feed wheat and spring beans)

Source: Andersons

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