Skill and a quality crop win best possible profit

3 August 2001

Skill and a quality crop win best possible profit

Skilled selling of good

quality crops helped limit the

damage to the arable

business at farmers weeklys

Easton Lodge farm last year.

Robert Harris reports

CEREAL prices have taken a real rollercoaster ride in the past couple of seasons.

Getting a good return these days requires as much luck as good judgement, says Easton Lodge farm manager, John Lambkin.

That modesty belies the effort he put in over the season to secure the best possible returns. And that effort helped offset sliding yields, lower area payments and higher fuel and fertiliser costs, which bit deep into Easton Lodges bottom line.

Net farm income for the harvest year (ignoring adjustments in opening and closing valuations) fell 60% to just over £9400, or, on an area basis, from £100/ha (£40/acre) to just £39/ha (£16/acre).

While prices slipped slightly, their overall contribution to falling output was minimal (see graph). The final average winter wheat price for Malacca milling wheat fell only £2/t to £81/t in a season that saw UK values vary by 25% or more.

"It helps having good quality crops to sell," says Mr Lambkin, referring to his policy of growing for premium markets wherever possible, rather than relying on yield alone on the notoriously drought-prone limestone brash soils. "We grow Group 1 milling wheats and we have been ACCS-assured from the start."

Mr Lambkin put 110t of wheat into Soufflets Tracker Fund as a benchmark by which he could judge his own results in the 2000 harvest year. "It is the equivalent of selling equal amounts of crop for each month you are in the scheme, without the hassle of having to do it."

Although Tracker returned a respectable £81/t for May movement, it could not match the £85/t Mr Lambkin achieved for the same tonnage on the same day by selling forward for April movement.

Wheat prices at Easton Lodge have remained remarkably consistent over the past four years, ranging from £79/t in 1997 to £83/t in 1999. "I keep a close eye on the market, listen to those in the know and take a view."

Oilseed rape slipped by £5/t (table 2). Being a no-frills, commercial crop it is harder to mitigate the effects of the open market. Sugar beet prices rose slightly, mainly due to lower yields which meant there was less C beet to dilute the A/B contract price. "We filled our 886t quota, and had just 146t of C beet left over," says Mr Lambkin. This reflects the policy of many beet growers, while contract beet is still the best paying arable crop, C beet made just £2.50/t after haulage last year.

Winter barley was the rogue crop of the year. Maris Otter, the mainstay of many a barley programme in the 1960s, was grown on contract for Cambs-based Gowlett Grain for a niche real ale market. "The nitrogen was too high and we made a premium of £3/t rather than the expected £35/t," says Mr Lambkin. "We have now scrapped the variety, replacing it with Pearl this year."

Despite this setback, the decision to simplify the crop mix, while retaining cereals, oilseeds, proteins and beet on the farm, paid off. In 1999, accountant Jane Evans, of Deloitte and Touche Agriculture, reckoned growing nine arable crops, including set-aside, cost the farm almost £11,500.

"Dropping linseed and spring barley meant the crop mix made a positive contribution of almost £3000 in 2000," she says (see graph). "But simplifying the cropping mix must be balanced with the risk of relying on single commodities."

But, like all arable units, falling area aid payments hit hard, cutting net farm income by more than £12,800, compared with 1999. The strong £ eroded the value of the k-based subsidy payments, and, even after agrimoney compensation was added back, the final figure of £220/ha (£89/acre) for cereals marked a 12% fall on the year. Set-aside payments fell even more sharply, but oilseed rape was the biggest casualty, falling £129/ha (£52/acre).

"Unfortunately, this is outside our control," says Mr Lambkin. "We hope the worst is over and that subsidy payments will stabilise. We shall continue to grow the same crops because the rotational effect of oilseed rape and peas are dramatic on the following crop of wheat."

Poorer yields also took a big slice off income last year, though this has to be kept in context, he adds. "The 2000 harvest was still the second best harvest since we took over the tenancy in 1966. The best was 1999."

So, although wheat yields slipped by 5% (table 2), they compare very favourably with the 8.7t/ha (3.55t/acre) five-year average, he says. "Especially when you consider about 20% of the crop was sown in December after beet.

"Cereals got off to a good start. We started sowing wheat on Sept 5 and crops looked good throughout the season. We were hoping for a harvest equivalent to 1999, though that was exceptional."

Oilseed rape yields matched the five-year average almost exactly. But in hindsight, swathing the tangled crop could have reduced cutterbar losses and boosted yields.

On a positive note, peas – coded vining varieties grown on a seed contract for Advanta for an £80/t premium over feed – turned in their best performance ever. "Switching varieties certainly helped. Although they were worth slightly less money, output was £12/ha better than in 1999."

On the input side of the equation, variable costs are proving stubbornly fixed. The farm total rose by about £5200 in 2000, though about £4500 of that is due to 1999 beet lifting and haulage being included in the 2000 accounts because of phasing problems. Even so, it shows that opportunities to make savings in this area are proving increasingly difficult.

"This is the sort of level we are going to have to live with if crops are to reach their full potential," says Mr Lambkin.

Seed costs fell by about £700 to just under £12,000. Most of the wheat was drilled early, allowing seed rates to be cut hard, with average spend falling over 25% to £29/ha (£11.74/acre). Other crops stayed broadly in line with 1999.

At £9000, fertiliser costs jumped back to 1998 levels, marking the end of two years "fertiliser holiday" when compound use was cut. "But we did not put any compound on the oilseed rape and we halved the amount of nitrogen going on the sugar beet. The ground gets a liberal dressing of pig manure in the autumn and we are getting penalised for high amino-N levels."

Mr Lambkin reduced Easton Lodges spray bill by £4500 last year, but he admits it was not difficult given the much drier summer. The wheat spray bill came to £117/ha (£47/acre) of which £69 was for fungicides. "Our programme is based around strobilurins. While they are expensive, they seem to boost yield and they protect the crop well." Winter barley bills, at £102/ha (£41/acre), are far too high, though moving to Pearl this year should halve that, he says.

Fixed costs, on the other hand, have been pulled back to the lowest level for years. The bill of £125,212 before rent (table 4), or just £518/ha (£210/acre) represented a 7% drop.

Labour bills were trimmed hard. The years total of just over £45,000 was almost 10% lower than the previous year, falling to £187/ha (£76/acre) (table 3). "We saved about £4000 on casual labour and secretarial costs. The former was mainly through reduced student overtime – we managed to get the muck out before harvest. We also made significant savings on straw carting because our new pig buildings can handle big bales.

"But we will always have a high fixed cost structure at Easton Lodge. It is often difficult in some areas to cost the enterprises separately; labour is a prime example. If we were a stand-alone arable unit, we would probably be able to halve our labour bill at a stroke.

"On the other side of the equation, we do charge a rent of £7000 for the pig unit, we also sell straw to it and get the muck," he says.

But Miss Evans is less critical. "If you look at the trend over the past five years, you really could not ask for much more. The trend is definitely in the right direction.

"Nevertheless, fixed costs must be constantly reviewed and challenged. During 2000, electricity costs were significantly reduced by sourcing from alternative suppliers. This could apply to all costs with existing purchasing being questioned and alternatives explored."

Power and machinery costs came to £257/ha (£104/acre). This is lower than last year, but still slightly above the five-year average.

Machinery and vehicle repairs are back in line, despite a large bill for the Land Rover. But they could be lower. Repair bills on the Fendt Tool Carrier are mounting (£3200 this year), even though the machine is only seven years old. "We bought it in 1993, having been assured that it was good for 10,000 hours or 10 years," says Mr Lambkin.

"I was naive – that has not been the case. While we expected a big depreciation figure, we expected that to be more than offset by lower repair bills. At the time, my neighbour started leasing Massey Fergusons. He has had three since then and is quids in."

Fuel and oil costs leapt by more than £2700. Red diesel started the financial year at 13.9p/litre and almost doubled before settling back to 20.5p/litre. "Thanks to OPEC and the fuel crisis, this tore a hole in the budget."

As far as cash is concerned, the business generated £38,500 after adding depreciation to the profits (per accounts) of £11,655. Although that was £10,000 less than the previous year, the net outflow of cash from the business amounted to just over £4500 in 2000, compared with £14,300 during the previous year. Nevertheless, the increase in net liquid funds (per accounts) of £20,605 was almost £8000 down on 1999.

But the biggest changes are due to stock differences and a sharp increase in debtors and a decrease in creditors. "The figures are going to vary with selling policy. These figures are literally a snap-shot of the year end," says Mr Lambkin.

So, while the business is not exactly living off depreciation, profit levels are a cause for concern. Although funds are set aside for drawings of £27,500 (for the purpose of cash flow, Mr Lambkin is treated as a sole trader), it is clear that profit levels are uncomfortably low.

"A business in this position could continue to avoid non-essential expenditure," says Miss Evans. "But various things are going to catch up on the business eventually – property maintenance, one of the first things to go in tough times, is a prime example."

The obvious step is to reduce labour. "As a sole trader, I could augment net farm income by £20,000 by simplifying the system further and doing all the work myself, with student help at peak times," says Mr Lambkin. "But, being a farmers weekly farm, that is impossible. I spend part of my time on magazine-related activities and a good representative crop mix and the pigs are a vital part of the business to maintain editorial interest."

Another way of boosting the bottom line would be to join forces with neighbours. Easton Lodge is already a member of A1 Farmers buying group and the obvious step would be to link up in other areas.

"Some members have already increased their businesses, and now operate almost ideal economies of scale. Another has gone down the added value route, growing specialist potatoes. So opportunities are extremely limited," he says. &#42

Table 1: Easton Lodge cropping 2000

Crop ha

Winter wheat 73

Winter barley 26

Oilseed rape 36

Sugar beet 20

Dry peas 38

Herbage seed 12

Set-aside 20

Total 225

Table 2:Arable statistics

2000 1999

Yield (t/ha)

Winter wheat 9.58 10.04

Winter barley 6.60 5.95

Oilseed rape 3.87 4.40

Sugar beet 52.79 66.52

Dry peas 4.59 3.70

Herbage seed 1.16 1.80

Price (£/t)

Winter wheat 81 83

Winter barley 74 105

Oilseed rape 119 124

Sugar beet 29 25

Dry peas 155 165

Herbage seed 523 542

Output (£/ha) (inc area aid and straw)

Winter wheat 1,070 1,127

Winter barley 838 987

Oilseed rape 775 988

Sugar beet 1,518 1,671

Dry peas 985 973

Herbage seed 835 1,279

Set-aside 221 317

Variable costs (£/ha)

Winter wheat 219 237

Winter barley 207 194

Oilseed rape 143 161

Sugar beet 674 745

Dry peas 203 217

Herbage seed 155 367

Set-aside 20 24

Gross margin (£/ha)

Winter wheat 851 890

Winter barley 631 793

Oilseed rape 632 827

Sugar beet 844 926

Dry peas 782 756

Herbage seed 680 912

Set-aside 201 293

Table 3:Arable summary

2000 1999

Areas (ha)

Under cultivation 225 225

Permanent grass 12 12

Roads and buildings 5 5

Farmed area 242 242

Gross margin* (£/ha)

Farm gross margin 623 719

Other income 50 53

Total gross margin 673 772

Fixed costs (£/ha)

Labour 187 206

Power & machinery 257 274

Property charges 33 27

Other overheads 41 49

Total fixed costs 518 556

Net farm income

before rent 155 216

Rent 116 116

Net farm income* 39 100

(Loss)/profit on sale

of previous harvest 9 (19)

Net farm income

(per accounts) 48 81

*Harvest year basis.

Table 4: Fixed costs (£) – year ended Nov 30, 2000

2000 1999

Labour 45,229 49,765

Power & Machinery

Machinery and

vehicle repairs 17,102 19,409

Fuel and oil 9,845 7,114

Electricity 2,148 3,155

Vehicle tax

and insurance 40 40


and hire 8,380 10,328

Plant and


depreciation 24,675 24,005

Profit on sale

of fixed assets — 2,288

Total 62,190 66,339

Property charges

Water rates 2,142 1,263

Property repairs 3,545 2,342

Depreciation 2,254 2,972

Total 7,941 6,577

Other overheads

Professional 250 1,393

Telephone 2,428 2,458

Office 3,817 5,290

Subscriptions 1,574 1,552

Sundry expenses 1,783 1,212

Total 9852 11,905

Rent 28,000 28,000

Table 5: Break-even prices 2000 (inc depreciation)

Wheat Barley OSR Peas

Average cost (£/t) 90 129 204 185

Area aid (£/t) 23 33 81 59

Break-even price (£/t) 67 96 123 126

2000 harvest price (£/t) 81 74 119 155

Table 6: Profit and loss account (£) – year

ended Nov 30, 2000

2000 1999

Gross margin

Cultivations 152,886 169,484

Other farm income

Contracting 2,590 3,802

Rental income 7,363 7,000

SSSI agreement

income 1,294 1,219

Sundry income 734 806

Total 164,867 182,311

Fixed costs

Labour (45,229) (49,765)

Power and

machinery (62,190) (66,339)


charges (7,941) (6,577)


overheads (9,852) (11,905)

Total (125,212) (134,586)

Net farm income

before rent 39,655 47,725

Rent 28,000 28,000

Net income 11,655 19,725

Deloitte & Touche Agriculture is a leading firm of agricultural accountants, taxation and business advisers. It concentrates on providing practical solutions for professional farmers, landowners and agricultural businesses.

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