What farm business risks to consider in uncertain times
© Tim Scrivener The combination of volatility and uncertainty make regular assessments of business risk more important.
High commodity prices mean good margins should be achievable for 2022 and, to a lesser extent, 2023, but hikes in both variable and fixed costs make it a high-risk period, said Jonathan Armitage, head of farming at Strutt & Parker.
See also: Succession planning – advice and case studies
Production risks
As well as the first line of risk management through variety choice, drilling date and absolute attention to agronomy, some might want to consider broadening their rotation and varieties, as well as producing for specific markets, suggested Mr Armitage.
With wheat the most profitable crop in most cases, there is an incentive to grow more and reduce the break crop area. “You’ve got to be brave to not grow something that could make more money in an extraordinary year,” he said.
“This will be a year when the costs of drilling crops in sub-optimal conditions will be felt most keenly, so it will be important not to be tempted to try to maul crops into ground in less-than-ideal conditions. Plans will need to be flexible.”
Knowing when to write off a crop will be increasingly important. With the oilseed rape area likely to grow significantly for harvest 2023, risk-adjusted gross margins can be useful, attaching a risk rating to a crop in trying to decide cropping plans.
Services
Contractors need to be well-financed and well-staffed – consider where you might be in their list of priorities, said Mr Armitage. “Big or small is not really the issue, it’s a question of where they are in the maturity of the business and how well managed it is.”
Financial risks
Identify and quantify financial risk and its potential effect on cashflow and profit.
High working capital requirements, especially in the tenanted sector, could cause cashflow complications that will be a real threat to the future of some businesses, said Mr Armitage, so consider a sensitivity analysis to examine the effect of, say, a 2% interest rate rise.
Cashflow forecasts should cover at least 18 months and while a 50% Basic Payment Scheme (BPS) advance in England will be welcome, there could be some big tax bills to pay next year.
Input price risks
Fixing a forward grain price of, say, £270/t with fertiliser at £600-£700/t can be a sensible risk-management decision – even if it does turn out you could have got a higher price by holding back, said Mr Armitage.
Debt risks
“When a truckload of grain leaves the farm these days, there is twice the value on that truck, so you’re twice as exposed for those 28 days until you get paid,” said Mr Armitage, advising growers to watch for changes in business practices – for example, late payments by those who would normally pay on time.
Policy and commercial risks
Consider what forthcoming legislation could affect the business – for example, changes to water abstraction charges and licences.
Some moves, such as BPS payment cuts in England, are imminent. Others could include a big customer requiring suppliers to be carbon neutral.
“All buyers have a direct interest in this and are genuinely concerned about this – they want to look after the commercial reality and not be behind the curve,” said Mr Armitage.
“Farmers will be asked to deliver on their protocols and expectations – it’s already happening in potatoes, for example, and growers need to be concerned for their own commercial benefit.
“Carbon is most often spoken of in terms of a potential income stream, but the role of the carbon footprint needs to be looked at and understood in the round,” said Mr Armitage.
Personnel risks
Consider what would happen if a team member left, became ill or retired.
Have a contingency plan for the short and longer term and share knowledge around the family and staff, so the business is not completely reliant on one person in any area or specialism.
Business risk register
Farmers manage risk every day, but a business risk register, commonly used in the wider business community, can help, suggested Mr Armitage.
This can be a simple list or spreadsheet where you capture the severity of the risks facing your business, calculate the potential effect of a risk event happening and then think through how to go about mitigating those risks.
Another way to manage risk
Renting out land to producers of high-value crops is an option for some, though the effect on fixed costs needs to be assessed.
Paul Madeley of Madeleys Chartered Surveyors, Shropshire, has seen this generally in smaller businesses.
Some farmers may not grow as much corn themselves this year, but will rent out the land on a cropping licence because they have looked at their gross margins and the price of grain isn’t high enough to offset the cost of fertiliser, fuel and labour, he said.
“We are seeing more of this happening on the Shropshire/Staffordshire border, with a lot more salad crops being grown by third parties.”
Those considering this option should get advice on comparable rents in the area before locking into an agreement.
Mr Madeley also anticipates more spring cropping.