Virtual Farm budget shows effect of lower grain prices

The Farmers Weekly/Savills’ Virtual Farm is facing a sharp drop in its budgeted pre-production profit for harvest 2012.

The original budget was set at Cereals in June 2011 but since then, lower commodity prices, upward pressure on costs and a weaker euro mean it looks as if it will be £113,624 worse off than expected.

Its production profit before rent, finance and single payment from the 2012 harvest was forecast at £136.50/acre but now stands at £80.69/acre.

Despite this, the Virtual Farm’s cashflow is improving and has been for the past couple of years.

“However, it is a top 25% producer and some farms may have to wait a bit longer [before improvements can be seen],” said Robert Hall, associate director of Savills Agribusiness.

Pulling sales forward could lock in profit – particularly on grain, which is worth £140/t for harvest 2013, compared with just £80-90/t as recently as 2008-09, he said.

The Virtual Farm may consider hedging the single payment against the euro, particularly if it continues to slip back to the levels of five years ago.

Early fertiliser purchase has been the right decision in the past few seasons but Virtual Farm is monitoring volatile fuel costs.

In the long term the farm is looking at options to diversify. With low interest rates, now is a good time for the farm to borrow to increase stable income, perhaps converting traditional farm buildings or investing in renewable energy sources.
• The Virtual Farm is a top 25% arable producer, an efficient, well-run business but facing depreciation and investment issues
• It was created by Savills Agribusiness and Farmers Weekly to identify challenges for similar businesses and design strategies to cope with them
• The farm model is a hypothetical family partnership.

See the full report

Futures contracts: farmer views wanted

Do you use futures and options markets to help you manage risk? Or are you interested to learn more? Farmers Weekly is keen to find out the extent to which UK farmers use these markets. Complete our survey here.

Take the survey

Futures markets and commodity risk management online course:

  • Risk management strategies for a more predictable financial performance
  • Educated conversations when collaborating with your advisors
  • Negotiate better prices with your grain merchants

View course