Is it best to expand or share?
Is it best to expand or share?
Expanding the area farmed can boost crop profits. But how
best should you go about it? Here we examine two
alternative ways for an arable farmer to reduce costs of
production and improve profits
EXPANSION
AT some point many arable farmers have the opportunity to take on additional land under a Farm Business Tenancy or contract farming arrangement, says David Winnard of agricultural consultants Laurence Goulds Burgess Hill office.
The example illustrated in the table shows an arable producer currently farming 200ha (500 acres) of IACS AAPS eligible land which he owns. Using the assumptions on yields and costs shown in the table, the business is forecast to generate a small loss after allowing for £18,000 in labour costs to cover the farmers drawings.
Opportunity 1 looks at the effect of taking on an additional 200ha of land under an FBT. It is assumed that the additional land could be farmed with marginal increases in labour and power costs. The average labour and power costs per hectare across the 400ha (1000 acres) should therefore decrease substantially.
Similarly, other overheads and land/buildings costs are spread over a large number of hectares. Costs for rent and grain storage are incurred and there are additional finance charges due to the increase in working capital (although the average finance per hectare decreases).
Opportunity 2 shows the effect of expanding further to 600ha (1500 acres), with 400ha of land under an FBT. Further reductions in labour, power and other overheads on a per hectare basis are assumed, although the fall is not as great as that seen when the business expands from 200 to 400ha.
The effect on the cost of production per tonne of wheat and oilseed rape are illustrated in the table – after subtracting area aid from total costs per hectare, the cost of production per tonne of wheat falls from £62.70/t (on 200ha) to £57/t (on 600ha). The total profit rises from a loss of £2150 with 200ha to £11,700 with 400ha and £26,050 with 600ha.
There is a substantial increase in working capital requirements.
Points to consider include:
• Level of rent tendered – decide on the additional profit required for the exercise to be worthwhile and the nature of the agreement.
• Take a realistic view on the increase in total costs.
• Ensure that the additional working capital can be financed.
• Note the sensitivity of profit to changes in crop yields and prices and area aid – a bad harvest on 600ha would have a far greater effect than on 200ha.
• Management – could you maintain the same level of performance across 600ha as on the 200ha unit?
• Scope for improvements on the existing unit.
Using machines across more acres can help cut unit costs. But is expansion or sharing with neighbours the best way to do that ?