Farming incomes set for tougher time
Farm incomes are likely to fall over the next two years as businesses feel the effects of higher working capital requirements and lower crop and milk prices, says Andersons.
The firm predicts that total income from farming (TIFF) for 2009 will fall from the £3.45bn peak seen in 2008 to £3.15bn this year and £2.95bn by 2010. That is despite currency assumed to stay weak at 1 euro = £0.85-0.90, a factor that has, historically, contributed to a rise in farm incomes.
“There may be a bit more to come if the pound stays very weak against the euro. But we’re not expecting a return to the income levels of the mid-1990s [when sterling was also weak],” Andersons’ Francis Mordaunt told delegates at a conference in London. “It’s a very different trading situation. Back then currency was very weak, but input costs were low and commodity prices very strong.”
Cereals and milk are big components of TIFF and both sectors faced a challenging year, he said. The firm’s Loam Farm model – a hypothetical 600ha arable farm – is predicted to have a negative margin from production (after rent, finance and drawings) of -£120/ha in 2009, a big turnaround from the £93/ha margin before single payment last year. “It’s sad to see, but the negative margin means the farm will be reliant on the single payment to turn a profit, unless something happens to prices by harvest,” Mr Mordaunt said.
The firm was also budgeting for a negative margin from production for its model 150-cow dairy farm. Milk price cuts, higher fertiliser costs and an £80,000 investment in additional slurry storage meant that the 2009 total cost of production was likely to be 27.5p/litre, resulting in a margin from production of -1.2p/litre. “However, the single payment will be significantly larger, meaning the business as a whole is still profitable.”
Prospects for beef and sheep were somewhat more encouraging, although Andersons colleague Richard King said profits for both sectors would be reliant on the value of sterling remaining weak.
“With beef prices at 270-280p/kg, most producers should be making a decent profit and there shouldn’t be too many cost increases to absorb,” he said.
“With better prices in 2008/09 and relatively low inputs, sheep producers too should have had a better year and the prospects for 2009/10 also look favourable. If sheep producers haven’t made a profit this year, they’re probably never going to.”
Farmers were advised to ensure they had management practices in place that could reduce market volatility. A strategic plan should set the overall direction of the business, but that should be supported by ongoing budgeting and cashflow management, as well as attention to procurement and marketing – paying particularly close attention to terms of trade.