MODELLING A FUTURE FOR ARABLE FARM
MODELLING A FUTURE FOR ARABLE FARM
What are the medium-term
prospects for arable farming?
Francis Mordaunt of
Andersons, the farm business
consultants, uses the RASE
Model Farm Businesses to
explain the implications of
the Agenda 2000 proposals
PROFITS from combinable crop farming have tumbled since 1997; at current prices the results for the 1998 harvest will decline even further.
The impact of this is clearly shown in the accounts for the three model farms used in the RASE/Andersons Model Farm Businesses project. Clay Farm is a 120ha (300-acre) unit on clay in Northants, Loam Farm is a 240ha (600-acre) unit on loam in Suffolk and Brash Farm is 480ha (1200 acres) on Lincolnshire heath.
Profitability for the model farms for 1997 harvest was 37-46%
What are the medium-term
prospects for arable farming?
Francis Mordaunt of
Andersons, the farm business
consultants, uses the RASE
Model Farm Businesses to
explain the implications of
the Agenda 2000 proposals
PROFITS from combinable crop farming have tumbled since 1997; at current prices the results for the 1998 harvest will decline even further.
The impact of this is clearly shown in the accounts for the three model farms used in the RASE/Andersons Model Farm Businesses project. Clay Farm is a 120ha (300-acre) unit on clay in Northants, Loam Farm is a 240ha (600-acre) unit on loam in Suffolk and Brash Farm is 480ha (1200 acres) on Lincolnshire heath.
Profitability for the model farms for 1997 harvest was 37-46% lower than in 1996. The size of the slump varied according to the nature of the farm, reflecting yield, production costs and the crop prices attained.
Had the farms been in the north of England and if crops had not been marketed before Christmas the results could have been even worse.
Budgets for the 1998 harvest year show further falls in profitability. That is due to low commodity prices, only partly offset by much lower variable costs for seed, fertiliser and sprays, and cutbacks where possible in fixed costs.
Fortunately, the model farm businesses can all survive, because there is no rent and they no longer carry significant borrowings.
The second 1998 histogram bar shows the effect of a rental equivalent. Here the 1998 budget is shown with the same rent equivalent in terms of finance interest as carried in 1991.
The differences between the 1991 and 1998 results at constant rent equivalent show the extent to which profits have collapsed and are now lower than they were before the MacSharry reforms.
Budgeting for 2000
In budgeting for the year 2000 a number of assumptions have to be made on key unknowns in the present uncertain climate of UK agriculture. These are:
• The final terms of the Agenda 2000 settlement.
• The implementation date of the next CAP reforms.
• The strength of the £ against the ECU/Euro.
• The strength of the £ against US$.
• World commodity prices.
The assumption made in this article are that the draft regulations for the Arable Area Payments Scheme go through unchanged (see panel for main points). It is also assumed that the planned starting date – harvest 2000 – is achieved. But that looks a tight deadline given the differing views of the 15 member states.
It is also assumed that the £ will weaken against European currencies to 2.7DM, but remain relatively strong against the $ at $1.65. No change is assumed in world commodity prices, with US soft wheat about $120/t and oilseed rape maintaining its relative strength.
The effect of these assumptions on budgeting is that the value of the green £ improves from 1ECU=67p to about 72p. This increases the value of area aid in 2000, but has little effect on commodity prices, as world prices remain the same with £s value against the US$ unchanged.
Future profitability
The budgeted results for 2000 under the new regime show increased levels of profit for all three businesses over 1997 and 1998 budget levels, but they are nowhere near the levels of previous years.
To a large extent the improvements come from increased yields and a shift towards more cereals and less break crops. Yield increases are justified on the basis that 1997 was not a particularly good year and some 1998 crops are likely to be affected by the severe wet weather.
The budgets also assume, perhaps somewhat optimistically, that costs will be maintained at budget 1998 levels.
At present we do not expect a wholesale retreat from break crops. But that depends on relative crop prices in the future and on the assumption made on yield losses from moving to increased cereal rotations. In addition, changes to work peaks and cultivation techniques have to be taken into account.
There has been no radical rejigging of crop rotations in any of the three models. On the Clay and Brash Farms it has been assumed that about 5% remains in permanent set-aside, because there are areas which are particularly poor. The Clay Farm already grows second wheats in rotations and that will continue with oilseed rape and winter bean breaks.
Loam Farm will continue with its first wheat policy, using oilseed rape and proteins as the breaks.
The Brash Farm will undergo the most radical change with linseed dropping out of the rotation after 2000. An oilseed and protein break will be retained, but with longer runs of cereals than before. These will be mainly malting barleys if reasonable premiums are available, otherwise feed varieties will be grown.
The effects of modulation proposals
It is now clear that if modulation is agreed by member states there will be no absolute ceiling above which no subsidy is paid, but rather there will be a tapering of aid depending on the total ECU/Euro received in any calendar year by an IACS business.
For the RASE Model Farms the calculation is simple, because there is no livestock. It is a case of multiplying the cropping by the relevant ECU amounts, which has been done for the three farms for both 1998 cropping and the proposed new regime post 2000. The table shows the number of ECU/euro in each case.
It is worth noting that the 1998 ECU amounts assume there will be a 25% scale-back for oilseed rape as seems likely.
On this basis all three farms will receive increases in the total number of ECU/euro received and only the Brash Farm is above the proposed threshold for limiting payments.
With the threshold at 100,000 ECU, an all-combinable crop farm in England growing no proteins would exceed the threshold at 258ha (637 acres).
The Loam Farm comes near to the limit with just 240ha (600 acres), because there is a high proportion of protein crops in the rotation. Those attract 427ECU/ha (173ECU/acre) compared with 388ECU/ha (157ECU/acre) for all other crops in England. The calculation for the Brash Farm follows.
Under the present proposals the Brash Farm would lose 18,200ECU/Euro, which, at 72p, would be worth £13,100. That represents about a 10% drop in profitability. If the proposals go through unchanged that will affect a large number of UK farm businesses.
The Brash Farm at 480ha (1200 acres) has not reached the optimum size for economies of scale. If implemented the modulation measure would penalise efficient businesses trying to compete in the world market.
Final comments
The economic climate for combinable crop farms is extremely harsh, but these model farm businesses can survive in the short term because they pay no rent and have been prudent in the good years, repaying almost all borrowings.
If there is no upturn in the economic climate in the next year or so the smaller Clay Farm will increasingly struggle to make a decent living. It is a sobering thought that after the Agenda 2000 reforms the dependence of these businesses on the subsidy will be greater than under the MacSharry reforms.
The next reforms may well be short-lived because of the forthcoming WTO negotiations. Those may well force the EU to give up the area aids coupled to production.
Changes in the key unknown factors for the future of this sector of UK agriculture could have a significant effect on future profitability, particularly the strength of the £. This, and future world market prices, are likely to be the key determinants in the longer term of how and in what form UK combinable crop farming survives.
Model farm details
Clay Farm Loam Farm Brash Farm
Farm soil type Clay Loam Brash
Typical location Northampton Suffolk Lincolnshire
Size (ha) 120 240 480
Grain storage (t) 530 940 1600
Labour Farmer+casual Farmer+1+casual Farmer+2+casual
Machinery:
Tractors and forklifts 3 4 5+ sprayer
Combine harvester contracted 1 1
AGENDA 2000
• Cereal Intervention reduces by 20% to 95ECU/t (£68/t) with no monthly increments.
• Area Aid for cereals, set-aside, oilseed and linseed at 66ECU/t (for England equivalent to 388ECU or £280/ha (£113/acre).
• Protein Area Aid at 72.5ECU/t (for England equivalent to 427ECU or £370/ha (£124/acre).
• Limits on payments per IACS business:
First 100,000ECU at 100%
Next 100,000ECU at 80%
Above 200,000ECU at 75%
• Labour unit option not taken up by UK.
• Cross compliance as yet unspecified.
RASE FARM MODELS
• Established in 1991.
• Used to simulate impact of CAP policy changes.
• Profits down for harvest 1997.
• Further falls likely for 1998.
• Harvest 2000 profits likely to be marginally up, despite Agenda 2000.
• Yield rises and shifts in cropping biggest help.
Change in aid payments
1998 2000 Change
ECU/Euro Euro Euro £*
Clay Farm 45,160 48,010 +2,850 2,050
Loam Farm 91,690 96,950 +5,260 3,780
Brash Farm 179,500 191,000 +11,500 8,280
*@ £0.72:ecu
Brash Farm modulation
Ecu/Euro Ecu/Euro Difference
Ecu/euro £*
At 100% 100,000 100,000
At 80% 91,000 72,800
Total 191,000 172,800 18,200 13,100
*@ £0.72ecu
At Cereals 98
Further details of the model farm businesses and the implications of Agenda 2000 proposals for the arable sector can be discussed with Andersons Consultants at the RASE Farm Business Centre at Cereals 98. Advice on the sort of action growers could take to offset the decline in profitability will also be available.