COMMODITY PRICE SLUMP HITS FARM INCOMES HARD

1 June 2001

COMMODITY PRICE SLUMP HITS FARM INCOMES HARD

BEFORE preparing any plan it always pays to review the current situation and how you arrived there. So, where is UK arable farming right now?

The reality is that farm incomes are at their lowest level since before World War II. When farm income is indexed and put into real terms to allow for inflation, the average for 1999 is just 23% of the average for the period 1940-1970.

Farm incomes have fallen particularly sharply since 1996. Between that year and the financial year 2000 farming income has fallen by nearly 90%. In 1999 the average farmer made a profit of £7500, which is less than the minimum wage. For the financial year 2000 most large accountancy firms predict losses of about £25/ha.

The main reason for this rapid fall-off in profitability, particularly for arable farmers, has been the large drop in commodity prices. The average price of winter wheat in September 1996 was £102/t. By September 2000 that had dropped to £59/t – representing a fall of over 40%.

That has been caused by falling world prices, changes to the CAP resulting in reductions in intervention levels and the persistent weakness of the euro against the £.

The last factor has also had a major impact on the amount of area aid payment received.

But it is the fall in commodity price, however, which has had by far and away the most impact on profits. In fundamental terms, if the commodity price drops 10% the knock-on effect at the bottom line is double.

With commodity prices falling on average by 40% it is clear why profit has dropped as much as it has. This rapid slide in profit has had a major impact on our agricultural workforce. Over the past two years we have seen 10% of the agricultural workforce leave the industry, representing just over 40,000 people. This reflects a determined push by farmers to cut their costs and move to larger units and economies of scale.

Quiet revolution

Over the past four years we have also seen a quiet, but marked increase in the number of contract farming opportunities. Most of these have been swallowed up by larger, existing farmers. Very few, if indeed any, have gone to new entrants.

The irony is that contract farming arrangements have moved very much from being in favour of the contractors back in 1996 to being in favour of the farmer by the year 2000. Some of these earlier contract farming arrangements are now struggling to even reach a divisible surplus.

Sundry income, or what some would call diversification, has become increasingly important to farmers in certain parts of the country to help bolster their rapidly falling farming profits.

Tenants capital, which is more often tied up in quota and machinery, has also been severely eroded over the past four years, as we have seen a fall-off in the price of second hand machinery and more importantly for the livestock industry, a rapid fall off in the price of quota.

All in all the current state of the arable farming industry, coupled with the wettest autumn and spring weather ever recorded, has led to fairly depressing times.

Surely things can only get better? As we report over the following pages, things do look set to improve. But the right management approach will be vital to make the most of any opportunities as they arise.

Table 1: Farm gate price comparison (1996-2000) (£/t)

(96-00)

Feed wheat 102 82 68 69 59 -42%

Oilseed rape 190 152 154 112 121 -36%

Potatoes 69 62 134 77 114 39%

Exchange rate (£-k) 1.2 1.43 1.46 1.55 1.64 39%