Cereals 2015: Reassess operations in face of further profit falls, farmers advised

With another profit fall forecast for 2016, arable businesses may have to fundamentally reassess the way they operate, warned farm business consultant Andersons at Cereals (10 June).

The financial impact of several seasons of low returns is building and farms need to make more from their farming as support falls, said the firm’s head of business research Richard King.

For some, a review of their business could mean getting off the treadmill, he said.

“It can seem a backwards step to reduce the farmed area, but sometimes profitability can be enhanced by focusing on core land.

See also: Call for realistic contract farming terms

“When returns were better, many farms expanded believing it would deliver a better business. In many cases these economies of scale have proved illusory.

“It seems almost to be a belief that if you are farming more acres, you will automatically be more efficient but there’s nothing automatic about it.”

Very high rents and farming blocks that were distant from the home farm were common challenges, while overexpansion had resulted in a loss of timeliness of operations for some.

“If someone has expanded at a high rent, it might make sense to walk away. Pride can be expensive.”

With bids to take on Grade 3 combinable cropping land still coming in at about £200/acre, people hadn’t necessarily done their figures well, he said.

Loam Farm, the firm’s model arable farm, looks set to make a loss of £148/ha from this year’s harvest before BPS.

In 2016, a slightly better crop price outlook means the loss reduces to £120/ha but, after a lower BPS, the overall business margin drops to a positive of just £49/ha compared with £53/ha this year (see table).

Loam Farm is based in the eastern counties and has been used since 1991 to track the fortunes of combinable cropping farms.

Loam Farm

£/ha

Harvest years

 

2013 (result)

2014 (result)

2015 (estimate)

2016 (forecast)

         

Output

1,204

1,132

1,008

1,035

Variable costs

457

426

428

426

Gross margin

747

707

580

609

Overhead costs

404

407

410

410

Rent and finance

194

218

243

242

Drawings

73

75

75

77

Margin from production

76

7

(148)

(120)

SPS/BPS and ELS

243

226

201

169

Business margin

319

233

53

49

Source: Andersons

It crops 600ha in a milling wheat, oilseed rape, feed wheat and spring beans rotation, and is based on real-life data. Like many farms it has owned and FBT land. Following a review, the rent on some of the FBT land rose to £375/ha in 2103.

Crops look good but at average yields, output will fall again. Overheads are drifting up – fuel prices have dropped but other machinery expenses have risen, general expenses are also likely to increase.

Also as for many other arable units, Loam Farm’s ELS agreement will have ended by 2016 and it is assumed that it will not be able to get into the new Countryside Stewardship scheme. This is the main reason for the lower level of support from the first BPS payment,

A small glimmer of hope for the sector is that any variance in the 2016 figures is probably on the upside, although that relied on weather affecting global output or a favourable currency shift, said Mr King, who thought that global grain prices had probably hit the bottom.

Weigh up options to weather 2015-16

Robust budgets, cashflows and a firm grip on machinery costings are needed to enable sensible decisions in challenging times, said Brown & Co at Cereals.

A high percentage of farmers were not yet feeling the pain as they made some good forward sales last year and 2014 yields were very strong, said partner and head of agribusiness consultancy Philip Dunn. He warned 2015-16 would be much more difficult.

However there were farming and other opportunities including expansion, contract farming, grant funding and cashing in underperforming assets.

“Money might be tight but, with the right business plan, ambitious businesses that are keen to grow will find themselves with opportunities,” said Mr Dunn.

“Smaller farms that could survive at £170/t but cannot at £110/t might opt for contract farming agreements [CFAs] or similar, to free up cash.”

Also, the new Rural Development Programme offered funding that could add real value to a business.

There was also scope to improve income through better management of underperforming assets and looking for new sources of income, said Charles Birch, head of land agency at Brown & Co.

“It’s always worth having a conversation about what else you could do,” he said. “Yields from new business ventures can often outweigh the relatively modest increases in commodity prices and the new ideas can often be quite simple ones.”

Options included:

  • Selling some non-core land
  • Renewable energy – including leasing sites for solar or AD
  • Recycling
  • Development interest for housing – get involved with your local plan
  • Conversion of farm buildings to commercial or housing for sale or letting
  • Paid work off the farm.

“Off-farm or edge-of-farm development alternatives all need to be looked at now, as they often offer the greatest returns with arguably less impact on the continuing business,” said Mr Birch.

For more news, photos, video and information on the Cereals event see our Cereals 2015 page 

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