Farmers advised to revisit stock and crop cashflow projections

Farmers should be reworking cashflow projections for the next 18 months in the run-up to Basic Payment Scheme (BPS) payment reductions, say advisers.

Volatility on the back of the coronavirus pandemic and lack of clarity on the UK’s EU exit terms also mean business planning needs more attention to identify cash crunch points, said Bradley Hurn, of consultant Brown & Co. 

For many arable businesses, this will come in spring 2021, he said.  

Those tendering for annual grazing or cropping ground or for longer-term lettings need to factor this into cashflow plans and tenders that BPS is going to start to fall from the 2021 payment.

“Some combinable cropping FBT [farm business tenancy] tenders have been at the £200/acre mark and that doesn’t stack up,” said Mr Hurn. “The tendency to spread that cost across the whole cropped acreage is not the way to justify it – that additional land has to contribute to profit.

“A lot of 2019 grain was sold before Christmas at £130-£140/t – not an exciting price, but the big yields mitigated the relatively low price to some extent. 

“However, the big yields have not created a large enough cash surplus to help with the potentially poor harvest of this year.”

New crop budgets

Turning to new crop budgets, the large expected carryover of barley into the new crop year on 1 June, combined with a big rise in the spring barley area for 2020, mean growers should be budgeting on the basis of there being no malting premium, says Mr Hurn.

“Our gross margins for average Grade 3 land are worked on a flat price of £115/t for harvest movement of feed and malting barley.”

Harvest 2020 gross margins

 

Spring barley (malting and feed)

Spring wheat (feed)

Winter wheat (feed)

Yield (t/ha)

6.2

6.5

8

Price (£/t)

115

155

155

Output (£/ha)

713

1,007.5

1,240

Seed (£/ha)

75

75

75

Fertiliser (£/ha)

140

180

210

Spray (£/ha)

125

140

180

Sundry (£/ha)

10

10

10

Total variable costs (£/ha)

350

405

475

Gross margin (£/ha)

363

602.5

765

Source: Brown & Co

The new Environmental Land Management (ELM) scheme will take years to fully deploy, so lower BPS sums should also prompt a review of structures.

On many farms, such a review could lead to a joint venture. “We’re definitely doing more arable labour and machinery joint ventures than we were five years ago, and there is a lot of scope for more,” says Mr Hurn.

“It’s not for everyone, but there are still big savings to be made, reducing investment in kit, releasing management time and using labour more effectively.” Such a change can also give a business the skill, ambition and/or the confidence to try new crops or markets, he said.

Livestock plans

Livestock producers often rely on putting a large number of stock through an individual autumn sale, but they might want to be wary of doing so this year, said James Brown of the same firm.

“Trade has been very volatile and splitting between two or three sales might be advisable to mitigate the effect of a bad day and even out the cashflow,” he suggested.

Equally, depending on what progress the UK has made on its coronavirus journey, the autumn sales calendar may be disrupted. 

Autumn sales calendar may change 

“There is a risk that a lot of 12- to 18-month old cattle may be for sale at the same time in the autumn, partly through disrupted sales and partly because low prices may have encouraged producers to hold on to stock they would usually have sold.

“Buyers, in turn, may feel constrained if beef and sheep prices have not improved over the summer,” said Mr Brown.

Markets are also being affected by smaller abattoirs reducing or changing their killing days, which is affecting buyer numbers at auction.

“As with the store and breeding stock, perhaps consider taking smaller batches of finished lambs or cattle in more often to reduce risk and smooth cashflow, where possible.

“Some might want to plan a split lambing next year to catch the early market with part of the flock – it brings higher creep costs, but higher market prices.”

Work out payment plans

Smoothing cash outflow can also be addressed. Contractor’s charges are often one of stock farmers’ biggest single bills and their timing is often out of kilter with income from sheep or beef sales.

“We have found many contractors are willing to work out a payment plan,” says Mr Brown.

“You agree the likely bill for the year and split it into 12 equal instalments, or as many as you agree suits both parties’ cashflow, with any difference being made up in a balancing charge at the end of the year.”

With a big drop in the wheat area for 2020, feed wheat prices could rise and new-crop barley prices are under pressure. The gap between the two could make barley worth considering in rations as long as the nutrition is right.

The smaller wheat area may lead to higher straw values for harvest 2020. Some producers with cash flexibility have bought stocks now to carry over into the winter, said Mr Brown, who suggested budgeting for a rise of 25% in straw costs compared with 2019 levels. 

Business review pointers

Is business structure correct? An arable or livestock joint venture could reduce risk, improve profitability, bring in new skills, release management time anA can start small.

Family labour Are time and costs being realistically accounted for? Is that labour being used to the best purpose – someone currently working on the farm may want to work elsewhere.

Are borrowings correctly structured? Review this and get advice.

Does the overdraft include a hardcore element that is always there? The business risk of interest rate changes and the “repayable on demand” aspect of overdraft borrowing can be reduced by putting that hardcore element onto a loan footing. This also imposes an element of repayment discipline.  

Many of the banks are agreeing capital repayment holidays, but plans need to be in place straightaway for how these payments will be made in future, in addition to what will become due in the meantime. There will also be extra interest on the deferred amounts.

With banks heavily involved in administering government-backed coronavirus loans, lending decisions may well take longer than borrowers want them to.

How is the livestock market changing? Are breeds those most suited to the farm? A change to more traditional breeds can mean easier management and lower labour costs.

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