Focus on farming to make higher profits

30 November 2001

Focus on farming to make higher profits

Big efforts to restructure arable farm businesses to

help reduce labour and machinery costs are

paying off according to the latest survey from

accountant Grant Thornton. Robert Harris reports

MANY arable farmers are trying to reshape their businesses in a bid to remain profitable. And some are succeeding, according to Grant Thorntons latest client analysis of combinable crops – part of its annual survey conducted over 74,000ha (183,000 acres).

"A great deal of effort has been made in the past 12 months to restructure farming businesses," says agricultural partner Gary Markham. "The main aim has been to reduce labour and machinery costs to survive."

Labour and machinery typically account for about 70% of fixed costs, so they are the obvious target. The average farm spent £296/ha (£120/acre), or 42% of gross output, on this combination in the 2000 harvest year.

The bottom 25% of farmers spent £363/ha (£147/acre), or 55% of gross output. Both are well above the 30-35% Mr Markham considers a realistic target, which was achieved by the top 25% group.

At first sight, average labour and machinery bills have not changed significantly since 1992, when farmers spent £289/ha (£117/acre). In 2000/01, they spent 2.5% more. But that that takes no account of inflation – in 1992 terms, labour and machinery costs fell to just £240/ha (£97/acre) in the last financial year. "That is a big saving. But the hard work is still to come," says Mr Markham.

Radical restructuring

It was relatively easy to trim costs towards the end of the last decade because many farms were over-staffed or over-mechanised or both. More radical restructuring is now needed, and contract farming and machinery syndicates appear to be popular and sensible choices.

The top 25% have made good progress. In 1998, this group earned the equivalent of £35/ha (£14/acre) on contracting, but spent half as much again, resulting in a net outflow of £17/ha (£7/acre).

By 2000, they turned this around and produced a net contra-cting income of £32/ha (£13/acre).

The average group has also improved, though it is still spending the equivalent of £7.40/ha (£3/acre). Meanwhile, the bottom quartile has shown little change, paying a net charge of £42/ha (£17/acre) for contracting.

"The result is that the top 25% paid £102/acre for labour and machinery in the 2000 harvest year, but these costs stayed stubbornly high at £147/acre for the bottom 25%," says Mr Markham.

The latter should seriously consider having all their land contract farmed, he suggests. "Our client data survey shows labour and machinery costs even for the bottom 25% of contract-farmed units amounted to just £114/acre in 2000/01."

But it is not just contracting that accounts for the differences between the best and the worst performers. Nor is size that important – the average group farmed 327ha (808 acres) and the top and bottom quartiles just 10% more and less respectively.

"The real difference is all about being focused on the job. That usually means the main earner – farming," says Mr Markham. "The best farmers are usually the best businessmen."

The figures speak for themselves. The top quartile made a management profit – money made from farming activities, net of rental equivalent – of £299/ha (£121/acre) in 2000/01, almost two-and-a-half times more than the average group. The bottom sector saw losses climb to -£67/ha (-£27/acre).

Good businessmen made the most of other farm income, including hay and straw sales, rents and grazing. The top flight averaged £64/ha (£26/acre), almost double the middle groups figure and over six times as much as the bottom 25%.

"This is an amazingly strong trend and shows how focussed the best performers are on the core business," says Mr Markham.

It contrasts sharply with non-farming income – or diversification. The bottom group earned £101/ha (£41/acre) through this route, twice as much as the other 75%. Although the table shows this helped narrow the gap at net farm income level, these poorest performers still returned a loss.

"While it may have helped their bottom line, one has to ask why their farming figures were so poor in the first place. It seems that diversification equals distraction," says Mr Markham.

There are other subtle pointers to business acumen. Organising the office can make a big difference. The bottom 25% paid the equivalent of £25/ha (£10/acre) in accountancy fees, more than three times as much as the top sector. "This £7/acre difference is the equivalent of the recent agrimoney aid that the government failed to secure," says Mr Markham.

"Farmers in the bottom group should employ a part-time secretary to get the accounts in order and deal with other paperwork. That could free them up to do more profitable planning and work."

Differences in crop output between the groups were less marked than in recent years, due to the appalling autumn and winter. But the top 25% still achieved better yields and prices.

Only this group made money on wheat in 2000/01 from direct farming operations – and then only £1/t.

Other income – from farming and non-farming activities – came to the rescue, leaving a £21/t margin. But the average group only managed a margin of £6/t, while the bottom 25% lost £9/t.

"The bottom group has been living off capital since 1995. And the average group has little room for error," says Mr Markham. "These far- mers would benefit from a well managed restructuring programme, which needs to be put into place soon. The top group shows it can be done." &#42

Top Ave Bottom 25% 25%

Arable gross output 306 294 291

Variable costs

Seeds 16 15 15

Fertiliser 24 26 26

Sprays 39 39 41

Other 3 6 8

Total 82 86 90

Arable gross margin* 224 208 201

Livestock gross margin** 14 7 4

Farm gross margin*** 218 192 179

Other income

Contracting 22 15 11

Other farming income 26 14 4

Business gross margin 266 221 194

Fixed costs Paid labour 16 25 34

Machinery Depreciation 43 40 44

Spares/repairs 15 16 19

Contracting 9 18 28

Other 19 21 22

Property 18 25 38

Administration 25 27 36

Total 145 172 221

Management profit 121 49 (27)

Rent 24 19 18

Finance 18 17 14

Non-farming income 22 21 41

Net farm income 101 34 (18)

* Based on arable area only. ** Based on livestock area only. *** Based on whole farm area.

Top Ave Botm 25% 25%

Yield* 3.63 3.54 3.46

Area aid** 89 89 89

Variable costs** 82 86 90

Fixed costs** 145 172 221

Rent & finance** 42 36 32

Drawings** 55 55 55

Total** 324 349 398

Cost*** 65 73 89

Other income*** 19 14 16

Net cost*** 45 59 73

Price received*** 66 65 64

* t/acre ** £/acre *** £/t

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