Archive Article: 1997/11/08
HARD times are here. Net farm incomes have fallen by 23% – and theres worse to come, according to the latest calculations by accountants Deloitte Touche.
A survey of the companys farming clients, covering more than 100,000ha (247,000 acres), provides a snapshot of the financial health of arable and dairy businesses for the year ending June 1997.
It makes salutary reading. For the first time in four years, growers in the bottom quarter (judged on net farm income performance) are now making a loss – £11/ha (£4.45/acre).
"Anyone in this position should take action now," insists Vincent Hedley Lewis, partner with Deloitte Touche. "They should ask how many such bad years they can survive."
For his average client, net farm income now works out at about £280/ha (£113/acre), and this is after deductions for finance charges and rent.
In the combinable crop sector, a series of good years has cushioned the blow. But financial pressure will mount, and returns from combinable crops will drop dramatically next year – by 45%, he suggests.
The five-year track record of the different sectors on income is given in the table – together with Mr Hedley Lewis crystal ball figures for next year.
The current combinable crop figures were given a boost by the excellent harvest in 1996, and relatively higher prices at the start of the marketing season.
But this year its been a complete reversal – prices have plummeted and the harvest was poor in most areas. These effects will depress the June 1998 figures. Mr Hedley Lewis predictions are made on the basis of £90/t for feed wheat, £160/t for oilseed rape, and £100/t for pulses, and yields at the average for the past five years.
Matters could be worse still for arable businesses with roots in the rotation (see the costings for a model farm in the panel). He is pencilling in a potential 76% fall in net farm incomes by June 1998, as a result of the continuing low potato prices this marketing year and lower sugar beet returns.
Growers should take a close look at their businesses now, he argues. Spreading overheads through expansion might seem the most obvious solution – but it could be a false move.
Analysis of his clients results shows that the most efficient farms are not necessarily the larger units. Best performances come from businesses ranging from 35ha (86 acres) to 4,000ha (9,880 acres).
"Efficiency comes down to the skills of the individual in charge, not to the size of the operation," says Mr Hedley Lewis.
Costs are significantly less with his front-running clients as compared with the average. But variable costs are not materially different, he points out. This is because efficient growers are not necessarily those who cut back on inputs – they are the ones who are prepared to spend on inputs, but use them more effectively to improve gross margins.
"Sadly, its labour that remains the biggest charge," he comments. The top businesses spend just £62/ha (£25/acre) on labour – the average wage bill is higher at £115/ha (£47/acre).
"Major costs, such as labour and equipment, need to be attacked. And many growers could be unfixing their fixed costs, by hiring equipment, for example."
Crops should be costed in terms of the whole business. "Gross margin performance doesnt show the complete picture. For example, if you switch to an all-wheat rotation because of the higher gross margins, but then need to buy extra combines, it may not be worth while."
Growers must also learn how to manage volatile markets, and use grain groups or options as a means of riding risk, he suggests.
Many producers in the combinable crop sector have become used to a lifestyle which may no longer be justified in terms of the financial returns from the business, says Mr Hedley Lewis. "Psychologically, cutting back on your cost of living is hard," he admits. "But its something that growers should now think hard about."
Hard times may offer opportunities as well as challenges, he concludes. The gap between the top sector and the less efficient is growing – this year the better businesses are making almost £600/ha (£243/acre) more than the worst.
"Traditionally, farming businesses do tend to hang on in there as long as possible – even when making a loss. But how many will survive these bad years? There could well be more openings for efficient producers to expand their operations – without having to pay £160/acre or so for the privilege!"
One in four farm businesses may now be in the red, says an accountant. Gilly Johnson hears how to stay in the black.