Focus on core cropping to maximise arable profit

Arable farmers who keep a tight focus on their own crop production are likely to make much higher per- acre profits than those running more diversified businesses while grain prices remain at reasonable levels.


Latest figures from Churchgate Accountants based on more than 59,000 acres show the top 10% achieved a net farm income of £240/acre in the 2011 harvest year.


That was well ahead of the top 25%, which still achieved a healthy £185/acre, and more than double the average £110/acre profit. The bottom 25% made £50/acre, according to the survey, which includes accounts with year-ends up to the end of March or April 2012.


The bottom quartile actually produced a higher gross output than average at £478/acre. But, more controlled spending and more efficient use of inputs put all other groups ahead at the farm gross margin level. Better control of fixed costs, especially labour and kit, split the groups further when it came to profit.


Gary Markham, director of farms and estates at Churchgate, said that better performers spent more time managing their core business and were less encumbered by high contract farming charges.


“The top 10% averaged 2,500 acres but none of that land was contract-farmed,” said Mr Markham. “This group also has a low non-farming income figure of £17/acre, compared with £30-40/acre for the other groups. These farmers are focused solely on their own crop production – that’s where the money is under current market economics.


“They have much less to distract them. Simply put, these are very good arable farmers, and with good grain prices, which averaged almost £150/t during the 2011 harvest year, they have come to the fore.”


Wheat production costs

  • Average wheat production costs soared by £40/t between 2007 and 2011 harvests

  • Using an average yield of 3.32t/acre across the five-years, there were marked production cost increases in 2007-09 and 2010-11

  • In 2007 it cost about £95 to produce a tonne of wheat, this rose in a straight line to £124/t by 2009

  • Two years later the cost had risen to £134/t

  • Feed wheat price rose faster than costs over the past two years of the survey, turning a £25/t loss in 2009 into profit of £14-15/t in 2011

  • Headroom is marginal, warned Churchgate, with chemical costs now at £80-90/acre and increased demands on working capital

The top group also avoided costly contract farming agreements, which eroded potential profit in some other groups. “FBT tenders have been grabbing the headlines. But, by the time contractors have paid a prior charge of £100-110/acre and 50% of the surplus to the farmer, contract farming agreements can end up costing the contractor almost £200/acre.”


While the average group had made good contract farming margins on a per-acre basis, the top and bottom 25% made considerably less. However, farmers in the top 25% farmed about 800ha and only contract-farmed an additional 120ha, so the overall effect on profit was muted. The bottom quartile farmed about 1,000 acres but contract-farmed a further 2,400 acres. That had a dramatic impact on profitability, said Mr Markham.


Comparing overall profit, the bottom 25% made just over £172,000 – about £1,300 less than the average group despite farming well over twice as much land.


“As a rule of thumb, once you get above 50% of the core area being contract farmed, economies of scale are harder to achieve and marginal costings are no longer marginal. In addition, farmers start to lose focus on their own production. Once all this happens, they can soon fall into the trap of adding extra acres for no additional return.”


































































































































2011 harvest income (£/acres)     

 


Top 10%


Top 25%


Average


Bottom 25%


Acres


3,096


2,213


1,299


1,026


Contract farming acres



283


277


2,415


Total farm size


3,096


2,496


1,576


3,441


 


 


 


 


 


Arable gross output


514


446


446


478


Variable costs


171


157


176


201


 


 


 


 


 


Arable gross margin


343


289


270


277


Contract farming income



152


246


95


 


 


 


 


 


Farm gross margin*


343


294


265


255


Labour and machinery


171


173


199


239


Property and admin


45


39


68


83


Other farming income


 


 


 


 


inc SPS, stewardship


114


105


101


88


Rental equivalent


18


32


22


11


Non-farming income


17


30


33


40


 


 


 


 


 


Net farm income


240


185


110


50


Source: Churchgate farm and rural business survey


*Calculated on whole farm basis


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