Coping with arable prospects for 2009

The past six months have proved to be a long time in terms of arable farming profit. Since presenting budgets for Andersons Loam Farm at Cereals 2008, adjustments have had to be made because of the weather, collapsing commodity prices and rising input costs.

This is shown in the table. Loam Farm is a 600ha example farm based on Suffolk Beccles soils with above-average, but not the best, performance. Table 1 (below) compares the 2007 result with the 2008 and 2009 budgets presented at Cereals, and with figures reworked in late November.

In 2007, a positive margin from production was achieved for the first time in many years and with single-farm payment and ELS support added in there was a satisfactory business surplus, giving a return that allows for reinvestment. Results for the 2007 harvest will be variable around the country depending on yield and, critically, selling strategy. In this example farm, 40% of wheat was sold forward at £85/t.

The 2008 result is not final, but the optimism in May/June has evaporated. Despite record yields, the positive margin from production is likely to be £100/ha lower than originally budgeted, but at least it’s still positive. Add in increased support from the SFP (due to the weak pound) and the business surplus is £90/ha lower than originally expected.

The original budget for 2009 was just showing a positive margin from production (£14/ha), after allowing for increased fertiliser costs and modest cereal price expectations. Since then P and K costs have soared and even the modest feed wheat price expectations of £120/t now look high. Oilseed rape and bean prices have fallen even more. The revised budget now shows a loss of £112/ha from production with the business relying on support again for profit.

Decision making

How should farmers react to this astonishing change in fortunes? Decisions should be based on a rational analysis of the individual business situation. This should start with an analysis of the crops’ costs of production.

When working from past accounts, there is a need to exclude private/personal expenditure so that only genuine costs of production are included.

Loam-Farm

Last spring’s optimism may have vanished, but there are still plenty of reasons to keep drilling this autumn, says Francis Mordaunt

The tricky part is how to allocate the overhead or fixed costs a straight per hectare basis would normally under-represent the costs of growing wheat and over-allocate costs against beans and oilseed rape.

The Loam Farm example (table 2) uses the ABC Machinery Costs Analyser software and allocates fixed costs on the basis of litres of tractor diesel used.

The expected 2009 costs are £121/t for feed wheat after allowing for lower diesel price and reduced fuel use for drying compared to 2008. At the time of writing (late November) the LIFFE futures contract for November 2009 is £108.75/t, indicating an ex-farm price somewhat lower. None of the Loam Farm crops have current prices that exceed the expected cost of production.

Anticipated loss

So why plant if a loss is anticipated? There are many good reasons why UK farmers continued to plant for 2009. We expect a small increase in fallow in 2009, but total crop areas will not be vastly different to 2008. Some of the reasons are listed below.

• Support from the SFP and ELS is worth £26.6/t in the case of Loam Farm wheat in 2009, so business profit is not jeopardised.The SFP is reasonably guaranteed until 2012.

• Markets may recover by harvest 2009. UK wheat prices are low, with a large crop of poor quality overhanging the market. Forecast global stocks have improved for wheat by an estimated 33m tonnes from the 2008 harvest, but the all-grain stocks have only increased by 24m tonnes. Therefore, overall world demand/supply is still finely balanced and although we think UK farmers will plant again, this may not be the case worldwide. With credit difficult, or impossible, at current prices, there may be a cut in wheat planting and of inputs in other parts of the world. If this is combined with a serious drought in an important production region there could be another upward price swing.

• Decisions not to plant a particular crop would have knock-on effects for subsequent rotations. On Loam Farm, the bean price is a long way below cost of production. But beans are an important part of the rotation as an entry for milling wheat.

• Perhaps the most telling reason is that many costs do not disappear if crops are not planted. The so-called fixed costs, particularly labour and machinery depreciation, are fixed unless labour is laid off or machinery sold – not a decision to be taken lightly. Most UK farm businesses are strong enough to plant now and see how the market develops. If prices do not improve, more drastic action may become necessary in future years, resulting in reduced crop areas and cutbacks in machinery and labour employed.

  • Francis Mordaunt is head of business research at Andersons, in Melton Mowbray

Table 1: Effect of weather and market turmoil on Loam farm

 

2007

2008

2009

Result

Cereals event

budget

Current

forecast

Cereals event

budget

Current

forecast

Gross margin

630

756

685

618

481

Overheads

283

336

366

361

348

Rent and finance

126

126

126

143

145

Drawings

100

100

100

100

100

Margin from production

121

194

93

14

-112

Single payment and ELS

225

236

247

229

237

Business surplus

346

430

340

243

125

600ha of combinable crops (winter milling wheat, winter oilseed rape, winter feed wheat, spring beans)

240ha owned, 360ha on FBTs; owner, one full-time worker plus harvest casual

Table 2: Feed wheat costs of production

 

2007

2008

2009

%

Yield

8.0

9.0

8.9

 

Seed

4

5

5

4

Fertiliser

14

13

31

26

Sprays and sundries

15

15

17

14

Labour* and power

40

45

43

36

Overheads

8

8

9

7

Rent and finance

16

14

16

13

Total cost of production

97

100

121

100

*Include £30,000 for the farmer’s manual labour.