Search for lost profits

17 July 1998

Search for lost profits

Low grain prices and reduced area aid combined to slash

profits at Easton Lodge in 1997. The challenge now is to

adapt to a new era of low returns. Robert Harris reports

LIKE many other arable farmers, John Lambkin must be wondering what he can do to claw back lost profits.

For on the technical front at least, 1997 ranks as one of the best years ever at Easton Lodge.

The drought-prone, brashy soils demand top crop management to produce a good yield. They got it, and they gave it.

At the same time, costs were held at or close to 1996 levels. Yet net farm income slumped to just £780, down from £25,151 in 1996 (excluding the last payment received in that year to settle the now-defunct Mill Farm management agreement).

It is no surprise to find that the catastrophic fall in cereal and sugar beet prices, caused in part by a series of green £ revaluations, accounted for almost all that loss.

Analysing the year-on-year difference between the four major factors governing output shows how vulnerable farmers have become to events outside their control, says Simon Bennett of accountants Deloitte and Touche Agriculture.

Yield was the biggest contributor to net farm income, adding over £21,000 year on year. Crop mix added another £3500. But low prices sliced a massive £46,000 off the figure, with cuts in area aid accounting for a further £3000.

The season kicked off to a promising start. Winter oilseed rape was planted just before a rare August shower, and germination was swift and even. Winter wheat drilling started in the last week of August, with John Lambkin keen to promote early growth and a good root structure to see plants through the usually dry spring and early summer months.

"There was a little bit of redrilling to do. But it only amounted to about 5% of the area," he says. Crops grew well in the mild winter, though he believes the ensuing dry spring hit yields, especially in the 20% of wheats which are drilled after sugar beet. "A lot of ear potential was lost through drought. But wheat averaged 7.62t/ha, a relatively good yield in the circumstances, given the proportion of late-sown wheat."

It was, in fact, the second best harvest on record, with only 1993 producing more grain, despite the heavens opening in the middle of combining. "The combine stood still for two weeks. But by that time we had cut all the rape, peas and barley, and most of the quality wheats."

Only the grass seed suffered unduly. Mr Lambkin recalls that part of the harvest with horror. "It was like trying to combine silage. We had to return to the yard three times a day to scrape the combine interior clean."

Yields were more than halved. "There is no doubt that grass seed yields, and the low specific weight wheats cut after the rain, would have dented the profits. But the effect was nothing compared with the price fall that followed."

Selling the arable produce turned out to be nothing short of a lottery. The process started well enough. Mr Lambkin sold his 83t of oilseed rape forward in September 1996, achieving £195/t for harvest movement, just about at the top of the market and only £7/t less than the previous year.

Seed crops, including spring barley and winter linseed, grown for the first time, also secured good returns. Herbage seed quality problems saw prices slip, though that loss was matched by an £80/t premium over feed achieved for the Sancho seed vining peas.

But average cereal and sugar beet prices for 1997 dropped by a quarter and a third, respectively, year on year. Average wheat price was just £84/t, compared with £112 in 1996. Overall beet price fell to £25/t, down from £38, due to the high % of C beet.

The first tranche of wheat – 75t of Consort – was sold in September 1997 for £100/t, payment end of June. "Looking back, I should have sold all my wheat then. The pattern of falling prices soon became horribly clear," Mr Lambkin recalls.

Within a month, values had collapsed. A similar sized package of Hunter, sold on the same terms, realised just £82/t, and a 100t consignment of feed wheat made £1/t less in December. It was downhill from there, with the last 150t making just £71/t.

High sugar beet yields, which were 30t/ha above the farms previous five-year average thanks to an excellent start and late summer rains, offset the lower beet price.

But had yields remained at the five-year average, a further £20,000 would have been knocked off the bottom line. It is a message Mr Lambkin cannot ignore.

"We normally aim to grow 200-300t of C beet. In dry years, it can be difficult to make the 880t contract tonnage. But at these prices, and with a 3t/ha yield penalty on the following wheat crop, I wonder how precious that goal is."

Relatively minor tweaks will help restore some profit, especially during lean periods when they have a greater impact, Mr Bennett reckons.

"John runs a very tight ship. As far as output is concerned, there is very little more he can do, given the type of soil he farms. He is certainly chasing yield, but soil type and rainfall are now limiting factors."

Total variable costs came to just over £59,000, or £263/ha (£106/acre), almost exactly matching the previous years figure. This compares favourably with Deloitte and Touches results for similar farms of £272/ha (£110/acre). About £6000 less was spent on fertiliser, bringing cost down to £58/ha (£23.50/acre).

Soil sampling, carried out every four years, added to agronomy costs, but allowed Mr Lambkin to target base fertiliser according to phosphorus and potassium levels. And all fertiliser was bought competitively in the autumn, whereas in 1996 some was bought on the expensive spring spot market when promised supplies failed to materialise.

Spray costs rose 11% to £18,000, averaging £80.50/ha (£33/acre). The main reason was the switch to winter linseed and a doubling of the area. Extra herbicides and fungicides were needed on this crop, and on seed vining peas.

Contract charges rose to £4130, much of that due to the cost of shifting an extra 1000t of beet. Fertiliser spreading charges were also incurred, with Mr Lambkin delaying replacement of a broken fertiliser spreader until cash flow allowed.

Variable costs savings are particularly hard to envisage. Seed rates have been trimmed, and further fertiliser cuts could reduce yields on the hungry soils. Mr Lambkin has not rushed to buy expensive new strobilurin chemistry. "I do not think we would benefit from enhanced yields on this type of soil." Significant savings on older chemistry are already being made through the A1 Farmers buying group, he adds.

Fixed costs have also come down slightly, to average £559/ha (£226/acre) before rent. Most of that was due to lower property repairs; major work on one of the farms cottages pushed those costs up to £17,000 in 1996.

Overall, overheads are higher than the Deloitte and Touche average of £492/ha (£199/acre). But, says Mr Bennett, as a farmers weekly farm, Easton Lodge carries some extra costs, notably labour and office charges.

However, further savings are anticipated, since 1997 figures also include £5000 of extraordinary costs for road repairs and filling in an old quarry pit. "When times get tough, these are the type of costs that can be deferred in the short term," says Mr Bennett.

For normal farming operations the underlying trend remains upward. Power and machinery costs rose just over 3% to almost £60,000, or £248/ha (£100/acre). "But that is not too far out of line with farmers in the area," says Mr Bennett. "Under the current system, they are about as tight as you can get them."

Machinery and vehicle repairs were up slightly, topping £16,000, though that is still substantially below the 1995 figure. A Land-Rover gearbox, which gave up the ghost just before the vehicle was due to be sold, cost £2000, and pickup repairs added another £650.

Annual services for the two Fendt tractors cost £1500. But Mr Lambkin maintains the money is well spent, since it helps to reduce the repair bill. "Having bought the best, I believe it pays to look after them."

The farm is also saddled with a depreciation charge of £22,415, up by £1400. During the year, Mr Lambkin spent £15,000 on a new Kuhn pneumatic fertiliser spreader, and a further £11,600 on a new set of Kverneland discs.

Mr Lambkin defends his decision, claiming more accurate application of cheaper fertiliser, a lower contract charge and reduced cultivation costs. And depreciation charges will reduce with time, he adds. "Next season they will be £3000 lower. But the new machinery book is definitely closed until we start making reasonable profits again."

But Mr Bennett reckons the farm could cut back on tackle. "There is enough machinery to farm 1000 acres." Mr Lambkin, though, maintains timeliness is vital for top yields, and scaling back, while cutting costs, could seriously hit work rates.

He also adds that the unit was geared to farming a larger area. The loss of Mill Farm is a blow, he admits. "For 19 years we had a very nice bit of management income. It has been sorely missed."

Expanding the business could do much to restore profitability, Mr Bennett agrees. "It could be done for little extra cost, provided a margin can be made over rent, finance, and first charges."

But chances are few and far between. Increasing the contract side of the business is tricky, since most call is for drilling or combining, which could impinge on Easton Lodges own performance, says Mr Lambkin.

Opportunities to take on more land are limited, short term at least. "There are several large farming companies in the area. Recently, a farm business tenancy went for well over £150/acre."

Another alternative is to use more contractors, and reduce the machinery burden, says Jane Evans, also of Deloitte and Touche Agriculture. "It could be worth considering, if proven to be a cheaper option."

Mr Lambkin says: "If anything, I have tended to go the other way. I will pay off the cost of the fertiliser spreader in two years, and I can apply the stuff when I want to. I feel that the more control I have over applying inputs, the more satisfied I am with the end result."

Increased co-operation within A1 Farmers might produce a radical turnaround, Mr Lambkin suggests. "There are six dynamic farm business managers within it. If we all pulled together, we could reduce our machinery and labour costs at a stroke."

A more simple cropping regime could be a good move, suggests Miss Evans. "That may help to pare fixed costs and reduce the amount of machinery needed."

Mr Lambkin admits seven main crops may look like overkill to some. But, being a farmers weekly farm, they add editorial interest, he explains. "Even without that constraint, I always think it pays to have your eggs in several baskets, especially on land like this. And I am keen to continue growing added value crops which are in demand. But I am examining the rotation for the 1999 harvest very critically."

As far as cashflow is concerned, the business generated £23,390 during 1997. But once reinvestment, tax and private drawings are taken into account, £26,383 of cash flowed out of the business. (In this analysis, Mr Lambkin is considered to be a sole trader to aid comparison with other arable farms.)

Assuming cash generated from operations will be the same next year, and the aim is to balance income and expenditure, the decision to curtail machinery purchases will help enormously, says Mr Bennett. "John also intends to cut discretionary costs like property repairs. But he will also have to reduce drawings. In difficult times, difficult decisions have to be made." &#42

Table 1: Easton Lodge cropping 1997

Crop ha

Winter wheat 98

Spring barley 13

Oilseed rape 22

Sugar beet 25

Dry peas 20

Herbage seed 13

Linseed 24

Set aside 9

Grass ley 1

Total 225

Wheat yields were the second best ever in 1997. But a fall in the average price was a big contributor to lower profits, says John Lambkin.

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