HSBC outlook: Focus on market returns as CAP support reduces

The increasing reliance on market returns as subsidies fall will demand greater cost-control skills and technical excellence.

A higher dependence on markets will also call for greater producer collaboration, said HSBC.

In the bank’s Taking the Pulse publication released on Wednesday (11 June), head of agriculture Allan Wilkinson stressed the wide gap between the best- and worst-performing farm businesses, with yield still the biggest driver of performance, providing the cost base is contained.

See also: Grain market outlook

HSBC dairy outlook

  • Increasingly competitive approach of processors looking for more milk
  • Cost of production contracts looking less beneficial
  • Reorganisation of milk contracts and procurement methods likely in 2014
  • Fresh milk markets weaker than processed sector
  • Overall return on capital recovering to more realistic level after many years of unacceptable results

The bank’s forecast for “high potential” combinable crop farms of 650ha showed a wheat production cost of less than £125/t, while on farms of the same size with low potential performance, costs for the same crop had climbed to £145/t.

There was no room for complacency, even in top-performing farm businesses. The very best operators continued to progress, investing in their management skill base, stayed alert to opportunity and were resilient in the face of volatility, said Mr Wilkinson. Understanding when to grasp the right margin based on cost management and not just market price was key.

The 2013 harvest produced a drop of more than 25% in profit for many arable farms, said Jay Wootton of consultant Andersons, who contributed to the report.

This was well back from levels anticipated when budgets were drawn up, even so it was probably a better outcome than the worst fears.

Active marketing played a significant part in defending margin. Well-managed farms reduced costs in line with the threat to output, with 20% reductions in agrochemical costs as well as achieving cuts to power, labour and machinery costs.

The collapse in the profitability of oilseed rape had provided a significant challenge for those farms taking the short rotation option. “The lack of sustainability in this approach has been compounded by loss of profitability on a significant proportion of the farm,” said Mr Wootton.

HSBC predictions

  • First base rate increases likely in second half of next year, with UK bank rate ending 2015 at 1%
  • Sterling will strengthen further against the euro to 79p until the end of this year but weaken to 83p by end of 2015

Looking ahead, 2014 had all the hallmarks of being a low-margin year of adequate supply and cost challenges, said Mr Wootton.

“It remains to be seen whether short-term rental levels will react as they should to the pressures in profitability in the arable sector.”

While the dairy profitability outlook was improving, financial performance in red meat was unsustainable, said Mr Wootton. Weak domestic demand was pressuring beef and sheep prices. Export markets suffered similar constraints, compounded by a strong sterling.

With total costs of production taking account of family labour at about £3.20/kg liveweight for beef cattle and £2.30/kg liveweight for sheep, producers were only recovering 65-75% of their costs from the market.


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