Archive Article: 1997/12/13

13 December 1997




It is time to invest in cultivation kit again, says a leading financial advisor. Heres why.

THE traditional reaction to falling prices is to cut spending, but many arable producers could benefit from maintaining their existing investment plans, says Gary Markham, Head of Agriculture at Grant Thornton.

He feels that too many growers have such significant scope to improve technical performance – particularly in relation to machinery usage – that judicious investment in the right equipment should not be delayed because of a temporary cash shortage.

"Many farmers feel cash-strapped now; tax payments on accounts based on the relatively profitable years of 1995 and 1996 are imminent; IACS payments may still be in the post and many have yet to sell 1997s harvest.

"Just to rub it in, they are receiving low prices for 1997 crops which were grown with high priced inputs," says Mr Markham. But he does see brighter long-term prospects.

"1997/8 should be better. Chemical manufacturers are already suggesting price cuts of 20 to 30% so input bills will fall and crop prices may rise moderately."

He urges farmers to take a more considered view and help ensure their businesss long term future by making judicious investment. This means refocussing attention on controlling costs.

"When crop prices are good there is a strong correlation between yield and profit. Farmers can justify using systems which guarantee yield, even if they are a little bit more expensive than the alternatives.

"As prices fall or become more volatile, that correlation weakens, and the link between cost and profit becomes stronger. In this scenario, judicious investment in machinery which can reduce costs and/or save time will prove its value."

Initial instinct

Obeying the initial instinct to completely stop spending is wrong for all but a few. "In the short term, if you are well kitted-up you may be able to do it. But if you have ageing machinery you will be saddling the business with higher production costs, because bills for maintenance and spare parts will rise. Timeliness may also be lost as a result of breakdowns."

Far better, he suggests, is a thorough examination of current machinery and labour use, because the gap between the best and worst is huge. Figures from Grant Thorntons annual survey of farmers working 28,000ha (70,000 acres) of combinable crops in the Eastern Region reinforce this point.

"For the 1996 harvest year, the top 25% spent a third of their gross margin on machinery and labour, whereas the average spent 44%, and the bottom 25% spent nearly 75%. There were huge differences in the efficiency with which they utilised their investments."

"The top 25% of farmers made a gross margin of £370/acre, with £116 of their £160/acre costs being for machinery and labour. Their management profit was £210/acre. Average farmers made £324/acre gross profit, with £144 of their £209/acre fixed costs being machinery and labour. Their management profit was £115/acre.

"The bottom 25% made gross margins of £246/acre, which would have represented a small profit if their costs were the same as average producers. But machinery and labour consumed £181/acre, with their total costs of £277/acre, resulting in a management loss of £31/acre."

While arable farmers have tended to replace tractors and combines during the sectors profitable years, Mr Markham suggests their investment focus should now switch to cultivation equipment, drills and crop establishment systems which can help reduce costs.

"Assuming the agronomy is in order, return on investment in this kind of machinery can be huge, particularly if they invest in machines with a proven long working life. While they still represent capital expenditure the equipment can have a cashflow advantage because annual bills for maintenance and spares may be reduced.

"In addition, manufacturers are currently offering very keen prices and finance schemes and terms are about as attractive as they are ever likely to be.

"More importantly, these machines can help make efficiency improvements, like making better use of recently bought high-horsepower tractors. This can lead to more timely cultivations, or enable work or land to be taken on, should the opportunity arise, thus spreading fixed costs over a larger acreage."

There are huge variations in the time taken to prepare seedbeds, and particularly between plough and minimal cultivation based systems. "If we apply the figures laid out below to a 280ha (700acre) arable operation, even the two-discing option saves 40 minutes/ha, which equates to 186 hours (3 weeks work @ 62 hr/week)."

"The exact figures will vary from farm to farm according to a host of localised factors, but these calculations give some idea of the scope for improvement which many farmers may be able to make." But he warns that minimal cultivations will not suit everyone, even if the figures seem attractive.

Savings

"The savings depend heavily on factors like location and soil conditions. Minimal cultivations work best on finely chopped straw, which maximises weed germination. They can cut labour and machinery costs while conserving seed-bed moisture, and achieve timeliness during peak seasons, which is important to achieving full yield potential."

As a footnote, he says the tax advantages of the current increased Capital Allowances should only be a secondary consideration. "At a 23% tax rate (on a partnership or sole trader) the current allowances are effectively worth an additional £5.75 per £100 invested in the first year."

However, much of this is clawed back in subsequent years, so that the average extra tax saving over four years is £2.44 per £100 invested.

"Concentrate on driving a hard bargain. "Dealers will be very appreciative of your business just at the moment, and will be prepared to offer some attractive packages."


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