6 ways arable farms can reduce business risk

Insufficient income and tight cashflows remain the main problems on many arable farms, particularly when viewed against the likely tightening of support payments.

The pressure points businesses will face over the near and mid term mean farms must review how they operate and consider what changes could be made to reduce business risk, says Brown & Co agribusiness consultant George Lane.

See also: Grain prices rise on weather worries

While cashflow is still under pressure, that pressure has reduced for many on the back of good 2017 harvest results.

Nevertheless, the net farm income (essentially profit) of many arable farms is not enough to cover drawings and capital.

On many farms, while the situation is not dire, neither is it sustainable in the long term, says Mr Lane.

He advises action in several areas:

1. Hold a family or partnership meeting

This is to discuss immediate issues and longer-term aims and should preferably include advisers.

Assuming the family wants to continue farming, assess all the options – do not dismiss anything out of hand, the right solution may not be the obvious one.

2. Address labour and machinery

Draw up a machinery replacement policy for the next five to seven years. This can be flexible but will help with cashflow planning as well as assessing requirements.

Keep a note of term dates for agreements and machinery related finance. Review the options at least a year before the term date of these agreements.

Timely planning will allow better decisions to be made than if things are left to the last minute.

Many have the potential to share machinery if the right partners are available in the right locations. This can start with just a single machine or operation.

Focus first on anything that has to be renewed in the next few years.

Changes in machinery could free up labour either for review or to be switched to other duties or a new enterprise.

3. Consider environmental schemes

Countryside Stewardship should be relatively straightforward for many and has the potential to include traditional farm buildings, depending on their use.

Also, investigate any local environmental initiatives such as those related to catchment areas.

4. Review rent

Brown and Co’s model farm, Browns Farm, has a 160ha farm business tenancy (FBT), representing almost 40% of its acreage.

This is at £200/acre. Mr Lane suggests reductions are possible where understanding landlords are prepared to work with tenants through what could be an uncertain three-to-five year transition.

“This kind of discussion is worth exploring where landlord and tenant have a good working relationship, however seeking tailored advice is essential.”

5. Refinance loans

Many farm businesses have loan arrangements with term dates where loan renewal is required, which may offer the chance to refinance at a better rate.

It is not unusual to see existing farm loans set up on higher interest rates than available now. These could realistically be replaced by a rate of 4-5% for a 20- to 25-year fixed term, says Mr Lane.

Refinancing existing loans does not work for everyone, but for many, it can relieve cashflow pressure by reducing repayment amounts and stretching the term over a longer period.

“It is worth studying the small print to compare settlement charges against potential repayment savings well before any review is coming up. This gives you the chance to shop around and consider what the alternatives might be.”

6. Use assets or diversify

Most farms can identify some underused assets, even if it is only scrap or second-hand value for unused bits of kit.

More significant assets such as underused or disused buildings and permanent pasture offer greater scope.

B&B pig accommodation, which requires lower capital than other new enterprises can use labour and provide an additional income stream, may be an option for many. “An alternative might be outdoor pigs used within the rotation on lighter land,” suggests Mr Lane.

“This is relatively straightforward, provided there is someone in the area looking to undertake such a venture, and could be done on a grazing/cropping licence or FBT.”

Alternative use of buildings such as holiday cottages, commercial lets and DIY horses can require large amounts of capital, although current grant funding could be taken advantage of in the right situation.

“Change of use, planning permissions and tax implications will all need to be taken into account and some of these can add significantly to the cost.

“Whatever alternative enterprises are put forward, the farmer must be interested in doing them or they won’t deliver the desired outcome.”

Bookkeeping

Is your system up to scratch? As with the ever-demanding paperwork, keeping up to date and on top of this is a must.

Good bookkeeping and an understanding of the figures will allow farmers to make accurate, informed and timely decisions says Brown & Co agribusiness consultant George Lane.

Consider investing in some help with this area, for example a part-time farm administrator.

Model farm

Brown & Co runs costings for a model farm, Browns Farm, which is based on a typical family partnership on an eastern counties unit of 368ha, growing combinable crops and sugar beet.

It has a mix of light and heavier land which means two rotations. Here the net farm income from the 2017 harvest year was £46,000.

Without BPS the farm would have made a loss of more than £42,000.

Several factors putting pressure on the business are the same as on many family run arable units:

  • Break crops are reducing average gross margins
  • High labour and machinery costs – the farm is a middling performer, with labour not fully used all year
  • At £200/acre, the farm business tenancy rent is too high
  • Borrowings for land purchase are at 7% interest, also too high. Capital and interest repayments total more than £68,000/year on the £570,000 outstanding, severely restricting cash availability
  • Some assets are not fully used – permanent pasture is rented out, old livestock buildings and traditional farm buildings are redundant.

Browns Farm net income for 2018 harvest

 

Budget

Gross farm margins

(ha)

(£/ha)

Total (£)

Winter wheat (light land)

78

642.50

50,115

Winter wheat (heavy land)

78

982.71

76,651

Winter barley

39

349.51

13,631

Winter OSR

77

650.57

50,094

Spring beans

38

335.08

12,733

Dried peas

39

591.44

23,066

Sugar beet

37

1,091

40,367

Arable margins

386

690.82

266,657

Rent received

 

 

9,200

Entry/Higher Level Stewardship

   

12,600

Basic Payment Scheme

 

 

89,250 

Miscellaneous income

 

 

7,787 

Total non-farming income

 

 

118,837

Total farm gross margin

 

 

385,494

Fixed costs

 

(£/ha) 

 

Property costs

 

27.83

 11,500

Labour

 

86.99

 36,537

Machinery

 

299.35

 125,726

General overheads

 

78.82

 33,104

Sub total

 

492.54 

206,867

Pre-rent & finance surplus

 

 

178,627

Rent

 

188.27

 79,072

Finance

 

125.36

 52,651

Sub total

 

313.63

131,723

Total net farm income

 

 

46,903

Source: Brown & Co

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