Cereals 2014: Tips for farmers to get production costs in focus

Building resilience into arable businesses is a major theme on the HGCA’s stand at Cereals. Louise Impey previews some key messages

Farmers must get a better grasp of their production costs, not just to improve business performance, but to put themselves in a better position to grow or adapt the business as becomes necessary.

“This is the first step in being able to improve the way your business works,” says Martin Grantley-Smith, head of business development at HGCA.

“For arable farms, price and cost of production are clearly linked,” he notes. Indeed, world events, not local issues, are behind the bigger business picture.

“That’s why we’re seeing far greater volatility in the prices of inputs such as ammonium nitrate and red diesel, but with an upwards trend, while the wheat price is on a downward trend. It’s becoming critical to look at your costs of production, not just at what your neighbour is doing.”

To help producers the HGCA is developing a national network of 24 Monitor Farms and 40 Arable Business Groups, to provide a powerful benchmarking resource and form the basis of an innovative knowledge transfer programme.

“The Monitor Farms are commercial farms, where the farmer or manager is prepared to give access to the farm and provide a forum for discussion. Each one is linked to an Arable Business Group, so the members can benchmark their business and seek ways to improve performance and profit.”

Key points

  • Understand your costs
  • Know where the profit is
  • Focus on big wins – usually labour and machinery
  • Spread risks
  • Consider opportunities to collaborate and share
  • Engage with local business groups

The first eight farms were launched in March, with plans for the remainder to be rolled out over the next three years.

Finding business solutions is the ultimate aim of the HGCA’s Reaping Rewards programme. “When farmers work together on complex issues, they come across opportunities to cooperate and share costs. They can also identify risk and adapt to a changing world,” he says.

Benchmarking and budgeting

If you don’t measure it, you can’t manage it, agrees Sebastian Graff-Baker of Andersons Midlands. Endorsing the HGCA mantra he says growers must set achievable and realistic targets for ongoing business performance and should identify best practice.

“Benchmarking will tell you what your total cost of production is and what the total cost of operating your arable area is. Without these, it’s very difficult to consider the options for business development and expansion.”

For 2013 wheat costs of production ranged from £119-206/t, with yields ranging from 7.3-10.5t/ha, he reports. Likewise, the cost of operating an arable enterprise ranged from £1,000/ha to £1,875/ha.

“These figures highlight three areas of potentially hidden cost – your own time, the cost of owned land and the cost of capital. All of them form part of the production costs total.”

Features of best performance

  • High yields
  • High level of crop inputs
  • Low overheads, especially labour and machinery
  • Realistic rents
  • Regular business reviews
  • Effective collaboration and resource sharing
  • Flexible approach to managing the business

Over one third of winter wheat growing costs are labour and machinery, which are within the farmer’s control, he highlights. “And if you include rent, over half of your production costs come under your control.”

Knowing which benchmark is relevant to your business is important, he adds. “It could be the market or selling price, or it may be the performance of other producers.”

Only by measuring performance can you make an informed and objective comparison with other businesses and identify any differences.

Price Risk Management

Farmers are well known for being price takers rather than price makers when it comes to selling their grain, adds Jack Watts, lead analyst for cereals and oilseeds at HGCA.

“But that tradition shouldn’t be used as an excuse. Deciding when and how to take the price is very important.”

While there is no single winning strategy it is essential the pricing strategy meets the business objectives that have been set, he believes. “And the two most common objectives are to make a profit and give some stability to the business.”

For most, there’s a desire to move away from a boom or bust situation and introduce some certainty. “It requires a different approach to simply treating your grain store as your bank account. Not all of the risks that we face are manageable.”

Unfortunately, grain markets do not respect costs of production in the short to medium term, he points out. “That’s why the price is so important for success. It’s a huge driver of total crop output.”

There’s usually a 36-month pricing window, he adds, so growers have a long time in which to take a price. “Of course, each season is driven by different fundamentals. There’s no reason for marketing this season’s crop like last season’s.”

The basic grain selling tools remain the same going into harvest 2014, notes Mr Watts, and growers should be familiar with all of them. “Spot selling, forward selling, averaging, target pricing and pools can all be used. You have to decide what level of exposure you are comfortable with and get the right balance.”

Trigger or tracking pricing can help when the market is in a downwards phase, as it removes the psychology that can influence selling decisions.

“And minimum price contracts or options are a good way of ‘putting a line in the sand’. Again, psychology can play tricks and convince farmers they are expensive.”

Using combinations of tools, such as having half the grain sold forward and half on a minimum price contract, helps work the market to advantage. “This sort of strategy protects you from the big price moves.”

Grain markets

The UK grain market is evolving and becoming more regional, continues Mr Watts.

“In the South and East, where there are both domestic and export markets, there’s a need for quality wheat. In the North, it’s all about high yielding feed grain.”

This year, the combination of good forward prices and reasonable weather means there’s extra grain supply in the Northern Hemisphere, he says.

“So we’ve seen price fluctuations since the new year and a return of previous volatility. The volatility is there because we need to stabilise stocks and keep up with the increase in demand, whatever the weather throws at us. So we’re not out of the woods yet.”

The global wheat harvest area is forecast to be 3% higher than 2013, but there’s still some uncertainty over the US wheat crop.

“The latest US crop forecasts are in line with expectations, but the weather has a big influence on the market.”

However, rising demand means that the US grain cushion continues to be depleted – which is similar to the world losing its comfort blanket, he points out.

“To sum up, for 2014 the market is as uncertain as the weather,” stresses Mr Watts. “That means we can pick a price somewhere between £110/t, if there’s reasonable weather, and £200/t, if there’s a noticeable weather event. At this stage, we can’t be any more certain than that.”

Grain contracts

Two key documents farmers need to focus on more strongly are the approved AIC contract and the HGCA Cereal Sellers Checklist. “These set out the terms at which you trade your grain,” advises Mr Watts.

“They should be just as familiar to you as the Recommended List.”

  • Check the payment and delivery terms:
  • When will you be paid?
  • What are the fallbacks?
  • At what level will there be a rejection?
  • Replacement costs?
  • Collection and delivery is at buyers call – what days can’t you load?

When loading, check lorries for cleanliness and get a receipt for every load. This paper trail should include:

  • The commodity
  • Approximate weight
  • Vehicle registration and trailer number
  • Name of haulage company
  • Driver’s name and signature

Should claims and rejections arise ensure:

  • You know what you’re selling
  • The buyer has your mobile number
  • Keep a sealed representative sample
  • Insist on being informed of claims before a load is tipped (unless there’s a fallback provision)
  • Independent testing

Growing for the market

For 2014 harvest, there are more Group 4 feed wheats being grown than ever before, says Simon Ingle of Openfield.

The reasons are obvious, he notes. “They offer a yield advantage of up to 10%, they have a minimal quality risk, no mycotoxin issues, lower input costs, and they can be delivered to local markets, with minimal haulage costs.”

More worrying is that Group 1 and 2 varieties are at their lowest level for a decade, while the Group 3 area has fallen from 45% to 12% in the past ten years.

“So there is a premium opportunity for growers. There will barely be sufficient Group 1 and 2 to meet miller demand and any weather issue will see them attract a healthy premium.”

His advice to those considering milling wheat is to seek a buy-back contract to underwrite a minimum premium. “Don’t fall into the trap of selling it cheaply.”

The Warburtons contract, for example, offers a minimum Group 1 premium of £20/t and a maximum of £40/t over feed wheat.

“It’s only for certain varieties, but it has a favourable specification.”

Consider spring barley too, where appropriate. “In East Anglia the maltsters are short of 300,000t of local crop.”