Farm business outlook 2022: Higher costs for combinable crops

At first sight, prospects for the cereals sector look good, thanks to high commodity prices and the relatively modest cost base for harvest 2021.

However, the mood is very mixed. Harvest has been exceptional for some, but poor for others.

While spot prices for cereals and oilseeds are at historically high levels, these figures hide lower averages achieved for the year, according to Joe Scarratt, partner and head of farm business consultancy at The Andersons Centre.

See also: Four farmers’ plans to cope with soaring fertiliser costs

Perhaps most importantly, all costs are increasing, and quickly. Fertiliser is the obvious one, but of more structural concern is the rising cost of machinery (essentially depreciation) and labour – or lack of it.

This inflationary pressure threatens to damage what is, for harvest 2021, generally a good margin before subsidy receipts – which are, of course, also in decline, at least in England.

Machinery costs shock

Machinery price inflation is a stark statistic. For example, the price of a 200hp tractor has increased by almost 70% over the past 10 years, according to the John Nix Pocketbook.

Take into account the additional 10-30% increases now being quoted, and prices are probably heading for doubling in that timeframe.

The costs of replacing, renewing or adding to buildings and infrastructure are also significantly higher.

The overall effect creates long-term structural depreciation charges for the business.

In the short term there is a risk that machinery becomes easily affordable from a cash perspective, as additional hire purchase costs may not be that noticeable when crop prices are strong.

However, in the long term this leads to an increasing depreciation (non-cash) cost to the business, assuming the system remains the same.

This is often overlooked, deterring analysis of the system and suitability of the resource level.

Overheads need closer scrutiny

Most businesses understand their variable costs well, but rarely spend much time examining overheads.

The classic mistake is to use “operational”-type costings, such as contract rates or costs/ha from management handbooks, when reviewing machinery and labour costs.

This process fails to correctly allocate all full-time labour, depreciation, repairs, fuel, plus other administration and property costs between enterprises.

The largest element missed is downtime and management time.

All these are key when attempting to understand the true cost base of a business. Failing to account for them can lead to a significant underestimation of operating costs.

True costs of joint ventures 

Joint ventures, particularly contract farming agreements (CFAs) in the combinable crops sector, have been employed to help mitigate cost and structural challenges.

However, care needs to be taken to reward the time, knowledge and input it takes to actually manage the crop/business, rather than simply the time spent carrying out operations.

All of this time, knowledge and input creates the pot of income for the CFA in the first place.

Wide range in performance

Attention to detail is the key to high performance, as the range in performance for feed wheat table (below) shows.

Overall, margins are very good due to current prices, and while the figures only relate to wheat, they serve as a stark reminder of the range in performance between businesses.

Although soil type and inherent geographical/layout differences will lead to varying output and costs, Andersons believes most variation is down to the way individuals manage the business.

With Basic Payment Scheme (BPS) reductions now a reality, maximising performance (balance of output and inputs) is clearly key, as is adjusting systems to access new income.

Assessing which areas of the farm are profitable and which are not can be a very revealing exercise.

Using wheat as an example, overall yields can be split into bands, and each of these assessed for their potential to generate profits.

Using a yield map from the combine, or one drawn up from farm knowledge, will provide a guide to the areas that either need attention or perhaps should no longer be cropped.

For many farm businesses, the Sustainable Farming Incentive (SFI) will help mitigate BPS reductions. It may also help to adjust systems to improve soil health and, perhaps more importantly, to reduce machinery costs in the long term.

Question high inputs 

Over the past two to three decades, combinable crop yields have become reliant on high levels of input, such as artificial nutrition, pesticides and movement of soil, says author Sebastian Graff-Baker, partner at Andersons Midlands.

This approach is increasingly being questioned as yields stagnate and the use of resources in farming comes under the spotlight. Regenerative agriculture perhaps suggests an alternative approach is possible, he says. 

The reliance on inputs is greater with poor soils. In effect, an increasing proportion of soil inputs, including cultivations, are well-organised insurance activities to ensure a reliable crop.

However, over time, some soils have been moved too much, sometimes when conditions are unsuitable, while livestock presence has fallen.

Organic matter levels and biological activity have suffered on some farms, leaving these soils less resilient and more intolerant of difficult weather, all too evident when soils in poor health have failed to support reliable crop growth.

Some key principles coming to light include minimising soil disturbance, ensuring soil cover at all times either with growing crops or crop residues, and using diverse rotations.

Whether farmers like it or not, policy appears to be heading in this direction and growers will find themselves trying certain new practices to find what works in their circumstances.

Moving away from an insurance approach to inputs and soil movement will require:

• An objective assessment of the current health of soils
• A realistic indication of the performance of the same soils in improved health (takes time to understand)
• Access to management that can deliver practices to return poorer soils to their former levels of health, resilience, tolerance and therefore performance
• To develop methods that can reduce our dependence on glyphosate (not easy with the desire to move less soil)
• A financial plan that provides for reduced profits during transition that can work with management as it becomes sufficiently confident to replace insurance with husbandry
• Consideration of transition and improvement costs.

Rather than assessing business performance annually, perhaps we need to consider how long it may take to recruit and foster a team of earthworms, mycorrhizal fungi and the myriad of available soil microorganisms, the cost of which is organic matter, attention to detail and time. Some have achieved it…