TIME TO LIFT GLOOM FROM ARABLE FARMS
TIME TO LIFT GLOOM FROM ARABLE FARMS
Now is the time to sit down
and plan the coming
cropping season. Big
changes will be needed to
both management style and
crop husbandry, so farmers
weekly asked land agent
Strutt & Parker to come up
with an action pack to
guide growers through
these difficult times. Over
the following six pages we
consider a host of topics to
help keep your business
afloat, starting here with an
overview by Chris Monk of
Strutt &Parker, Chelmsford
IS YOUR arable farming business achieving the short-term and long-term objectives of you and your family?
At face value it may not be, given the generally poor prospects for crop yields and prices this year. But what about the longer-term future? Planning for recovery now is the key to future success.
To start that process it is important to review the structure of each arable enterprise, including such things as the proportion of rented land and the capital involved in the business, as well as the return on that capital.
To do this exercise properly the information from past accounts and forward budgets needs to be compared with benchmarks (see also page S12).
Rent and interest
First, look at the existing level of rent and interest paid by the business, which together form the rental equivalent. The rent and interest paid divided by the total area farmed in hectares should currently be less than £200/ha (£81/acre.).
Some blocks of land can exceed that, provided the average is £200/ha or less. This will give you an indication of your difficulties and additional costs of production compared with other farms.
Secondly, look more closely at the interest, finance charges and the level of borrowing. Even with the current low base rate, total borrowing needs to be kept down and continually reduced. If losses have been suffered in the past two years this may well have increased borrowing via the overdraft.
It is the serviceability of the borrowing that is critical. If the borrowing is high, look at surplus assets which are not important to the core business, such as small areas of land, buildings, telecom towers or rights that may be much more valuable to others. Can these be sold or realised in some way to reduce the borrowing?
There is often a dilemma here with diversification, because the cost of converting farm buildings to let requires additional capital. It may be better, if those buildings are off-lying, to sell the buildings for somebody else to convert if there is already a shortage of capital.
It is helpful to examine the return on tenants capital. If a full rent is not paid, then an additional figure to represent the full market rent needs to be deducted from the profit and the result divided by the tenants capital tied up in machinery, working capital and the like.
The return on an arable, combinable business should be 5%-10%. To put this in perspective, it is usually possible to get a 5% return on cash invested on deposits, whilst converting and letting surplus buildings in some areas can produce a return in excess of 10%.
So, if you are not getting 5-10%, you need to think carefully about the performance of the farm and the machinery capital tied up in the business.
If necessary, reduce the capital by hiring or sharing more machinery or entering a joint venture farming company, for example. Alternatively consider increasing the area farmed with the same tackle in order to reduce the tenants capital per hectare and improve the return.
Rents paid
Next, look more closely at the rents actually paid for 1986 Act tenancies, FBTs, as well as the rental equivalents for contract farming agreements. What profit are you actually making from the contract farming agreement allowing for the additional management and higher risks?
If you have several contract farming agreements/FBTs, look at them closely. There may be a case for giving notice on some and tendering for a new one at a lower rate or on better quality land, or with less baggage.
Set-aside factors
Think about your set-aside and the effect of cropping it. A number of farmers are now renting additional land as set-aside to release their good arable land for 100% cropping. This allows other farmers to effectively set-aside 100% of their farm at a rent of, say, £220/ha (£90/acre).
Whatever you do, try to keep your holding numbers, as these may become relevant again with any revised agricultural support post foot-and-mouth.
Finally, when you have looked at all these areas, consider the optimum size. Unless you have a special situation this is probably at least 200ha (500 acres), but preferably 400ha (1000 acres).
For those with the right yields, variable inputs and overhead cost control, there can still be significant benefits from increasing size.
coverage continues overleaf
Help to lift the gloom over arable farming by planning a more profitable future. That was the brief for the Strutt &Parker team, which has drawn up this action pack of advice for growers missing their annual fix of business management pointers at the Cereals Event.