Less cropping can mean more profit

High costs, low farmgate prices and many other risks make it crucial to identify where profit is being made in a farming business. Less cropping can often mean higher profit.


“Too many arable units are growing crops which reduce their overall profitability,” says consultant Nick Blake of Andersons Midlands, Uppingham.

He suggests calculating core profit as a starting point to determine cropping policy. “This is not a new approach, but with a decoupled Single Farm Payment (SFP) it should be done for every business to assess viability of a cropping plan. The plan can then be altered annually to achieve the most likely crop mix to be profitable.”

Core profit is the minimum profit a business can make before any crops are grown. It accounts for non farming income, plus SFP and environmental payments.

On the cost side will be labour and machinery, property and administrative costs, rent and finance. For many arable businesses, the level of SFP and environmental payments will mean that there is a profit before any cropping.

The next stage is to add crops one-by-one to see the effect each has on overall profit and identify the proportion of the farm that can contribute the best overall profit at current prices. “Working through this calculation alongside farmers means they have an appreciation of the position, even if they don’t like the outcome,” says Andersons Midlands partner Sebastian Graff-Baker.

“Cropping profit should always add to core profit,” says Mr Blake. “Over an average five-year period, many break crops will reduce profitability.”

Based on costs and prices for a 400ha farm, there are huge differences in profits (see table) with the business set to miss out on £66,403 of profit by cropping all of its land with wheat, barley and oilseed rape, using predominantly dedicated labour and machinery.

Taking half of the land out of production and growing feed wheat on the cropped half of the area, together with using outside labour and machinery, increases profit by £70,403, the difference between the financial performance of the two systems. These figures do not account for SFP, environmental payments or other non farming income.

Challenging the taboo surrounding leaving land uncropped is difficult. However, more growers today are facing that taboo, says Mr Blake.

Most of those who make the decision not to crop will choose to fallow for a good entry for wheat, although there are opportunities to let land out on a short-term arrangement. There may also be environmental scheme possibilities, for example enhanced overwintered stubbles under Higher Level Stewardship (HLS) in some regions.

Assessing risk to the business is also an important part of deciding future direction. People are aware of risk conceptually, but an exercise which looks at profit contribution, crop-by-crop, forces them to look at whether they are prepared to gamble the £70,000 which in the example is the difference between the two systems, says Mr Graff-Baker.

“Some decisions are unpalatable, even if they are logical. While it’s a fact that many could produce more profit by cropping less land, an argument we often get against this is that it doesn’t allow a business to react to or benefit from sudden price rises,” says Mr Graff-Baker.

“This can be countered in that the one year in five or 10 when you might get runaway commodity prices probably doesn’t compensate for the losses incurred in the other years by continuing to grow unprofitable crops.”

As well as the argument about missing out on price hikes, many may consider their profit level sufficient from a continued full mixed cropping regime and do not want to contemplate the upheaval demanded by a new system with less cropping, says Mr Graff-Baker.

“When assessing the financial position, beware of the danger of mixing cash and profits. While cash is essential, it doesn’t necessarily indicate profit.

“As well as knowing how much you made last year, you need a reliable forecast of the current year’s profits. There are some businesses which, looking from the outside, you would expect to be well run and well documented, but they are often not fully aware of the underlying performance of their business.

“If the core profit exercise shows that only part of your land should be cropped, this raises the question of whether structural changes can or should be made as a result of that decision,” says Mr Graff-Baker. “However, before you adopt radical changes, check whether there are technical issues that can improve performance. For most businesses, the answer is probably not, but it is easy to check how you measure up against other similar farms.

Structural choices

“Assuming there are no easy technical fixes, work through the choices for changing your system. The best option is not always the most obvious one.

“Essentially, the question is which parts of the farm form the core activity and what is the minimum cost you can get labour and machinery down to on that land? If, as on many farms, there is just one labour unit, either the farmer or one employee, then it is often difficult to see how anything can be reduced, but it is also hard to make the case that the business retains dedicated labour and machinery to do every task.”

Many growers will have to think more broadly than in the past and consider the cost to the business of not changing, says Mr Graff-Baker. “Why forego profit every year when you could accumulate the potential for an alternative investment or enterprise, especially at a time when new borrowing is hard to come by? Admittedly, it’s not an easy decision and one that some people will not make even after they have seen the figures.

“Inevitably there are businesses which are at a certain point in their development where it is a logical, or a good, time to implement a change, or indeed not to make immediate changes. They may have some key items of machinery which require replacement, for example.

“The opportunity cost of land and buildings, labour and capital is hardly ever considered,” says Mr Blake. If you decide not to crop some land, or change your cropping so that some storage assets are not being fully used, make the most of the financial and practical benefits (such as time) which flow from that decision.”

Profit contribution from cropping (400ha combinable crop unit)

 

Feed wheat

Spring malting barley

Winter feed barley

Winter oilseed rape

Feed wheat only

Area (ha)

133

67

67

133

200

Yield (t/ha)

10

6.94

8

3.5

10

Output (£/t)

105

115

90

255

105

Cost of production (£/t)

113

136

135

302

103

Net margin (£/t)

-8

-21

-45

-47

2

Net margin (£)

-10,640

-9,765

-24,120

-21,879

4000

Contribution to overall business profit (£)

-66,403

4,000

 

 

 

Change in profit (£)

70,403

 

 

 

 

Source: Andersons

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