True cost of wheat production is rising

Watch out for cost creep – although the 2013 harvest was easier to gather, yields were variable and costs have risen, warn advisers.

The true cost of growing wheat on mainly East Anglian farms rose to £1,041/ha for the 2013 crop, Brown & Co’s Rob Hughes told those at Fengrain’s annual conference.

At a representative yield of 7.9t/ha on mainly Grades 2 and 3 land, this put production at £131.77/t in 2013, a rise of 2% on 2012’s production cost of £129.11/t.

Although variable costs had fallen by more than 8% as a result of lower rates of chemical use and lower fertiliser prices, overhead costs shot up by 10% from £580/ha to £638/ha, more than outweighing the variable cost savings.

“Beware of cost creep,” warned Mr Hughes. “It’s OK if it is planned, but it must be carefully costed and managed. Beware also of making ‘soft’ decisions – taking on extra staff and seeing labour costs increase is a bit of a classic.”

Wheat production costs 
for 7.9t/ha crop
(28,000ha of Grades 2 and 3 land – mainly East Anglia)

2012

2013

Variable costs £55.70/t £51.01/t
Fixed costs £73.42/t £80.76/t
Total costs £129.11/t £131.77/t

Source: Brown & Co

Rent and finance costs, along with labour and general overheads, saw the biggest increases.

A rise of more than 25% in general overhead costs meant this element of fixed costs needed more scrutiny – electricity costs were falling as renewables became more commonplace on farms, but office costs, insurance and professional fees were rising.

“Depreciation has risen quite markedly in some businesses – we are coming out of a period of living off depreciation and with machinery investment now taking place, depreciation is creeping up to £50/acre on some farms and even higher in some cases.”

While base rate had not risen, finance charges were creeping up because of the margins and fees imposed by banks. Any increase in base rate rise would hit some businesses hard and budgets must include some sensitivity to this risk, said Mr Hughes.

He reinforced the need to calculate accurate unit cost-of-production figures – without these, sensible business decisions such as sales and expansion opportunities could not be properly evaluated.

The marginal cost of taking on extra land to expand must be carefully calculated, too. Too often people were relying on a yield of 8.6t/h of wheat, a yield many had not averaged during the past five years. A lower single farm payment must also be factored into costings, as well as exchange rate risks.

Brown and Co’s sample includes about 28,328ha and while the figures include Agricultural Holdings Act rents and owner-occupied land, no Farm Business Tenancy rents are included in the sample.

Wheat production costs    
 

2012 

 2013 

  £/ha  % of total   £/ha  % of total 
Variable costs  440  43.14  403  38.71 
Labour  96  9.41  110  10.57 
Machinery  225 22.06 225 21.61
Rent/finance  197 19.31 225 21.61
General overheads  62 6.08 78 7.49
Total  1,020    1,041   
 Source: Brown & Co    

 

 

 

 

 

 

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