The challenge this year will be to make any profit at all from production and farms which are looking for a long-term future in production are being urged to consider how they can make them more economically viable.
Graph 1 shows making money from arable production is not an easy business. It uses the figures published by The Andersons Centre based on its notional Loam Farm, a 600-hectare part-owned and rented unit.
What they show is feed wheat profits from production have only been made four times in the last seven seasons, with another small loss predicted in 2015. It also has to be stressed these figures cover a period which has seen historically high grain prices.
Graph 2 shows although costs have fluctuated over the last seven years, they have generally moved upwards over time, especially when looked at on a cost per hectare basis.
Graph 3 illustrates the largest increases in expected costs from 2008-2015 have taken place in rent and finance (up 90%), sprays (up 75%) and fertiliser (up 54%), but the largest costs remain labour and power which account for 36% of expected outgoings in 2015.
Graham Redman, a partner at The Andersons Centre says it is now more important than ever to understand what value costs are adding to the business.
“Farmers need to develop systems where they can measure the output they achieve from the costs they incur and see where improvement can be made,” he says.
“For some that might be seeking to increase yields while not increasing costs, but for others the tactic might be to opt for a lower yielding or an alternative crop and I can certainly see growers this year planting more spring crops to reduce costs and in the process meet the new three-crop compliance rules and tackle a range of persistent weeds such as black-grass and sterile brome. Whatever approach farmers take, I would urge them to be ruthless and let their heads overrule their hearts when assessing costs.”
This approach might mean taking difficult restructuring decisions about staff or machinery, but they might be essential if the business is to strengthen over the longer term, says Mr Redman. He says he still sees plenty of incidences where farmers have too much machinery – sometimes three tractors to one person – and the higher commodity prices of the last few years has resulted in some over-investment in machinery.
“Farming is unlike many other industries in there is always going to be a seasonal variation in how much machinery is used, but that does not mean there is a need for a spare tractor just to make life more convenient.”
Mr Redman also argues determining the value which staff are adding may not necessarily mean making people redundant.
“It is worth assessing what value each action carried out by staff adds to the business. There are obviously times, such as combining, when there is a very definite benefit to the business, while activities such as groundwork and spraying are essential and jobs such as maintenance can save money over time, but it is always worth asking if some jobs are largely time-filling and rather than adding to the business actually cost it.
“In those circumstances, it is worth exploring the possibility of contracting staff out to other farmers or other jobs entirely so they bring in revenue. With more than 50 per cent of farms receiving a diversified income, looking outside the farm for extra revenue is nothing new, but finding new sources of off-farm income might become important again with profits under pressure.”
Mr Redman says getting the farm business into shape has been given more urgency because of the falling support from the Common Agricultural Policy, with payments due to reduce by a quarter by the end of the next round of the policy in 2020.
“Protecting and investing as much of that payment as possible will be important to help weather future price volatility.”
According to Will Gemmill, head of agriculture at Strutt and Parker, the cost of production is a hot topic among the company’s clients.
Barring political or climatic disasters, grain stocks are likely to increase over the next three years putting pressure on prices, he says.
“We are budgeting on grain prices trading in the range of £115 to £125/tonne for feed wheat in the coming seasons,” says Mr Gemmill.
“That means making money will be tight over the next couple of years. We estimate the cost of production for a wheat crop last year was about £135/tonne when a notional rent is taken into account, while better yields this year may have reduced the cost of production to £110/tonne.”
It is important to look more closely at costs, he says, but not to lose sight of the power of greater yields to spread costs and deliver a profit.
“Our analysis shows the growers in the top 25 per cent for yields are also in the top 25 per cent for gross margins and profits. The reason they are in that top quarter is they know what their costs are, they know what value those costs add to the business and they know when to reduce or increase costs to maximise value.”
Mr Gemmill advises growers to use benchmarking tools, including HGCA’s CropBench+ benchmarking programme which allows users to analyse the value of their labour, machinery, land and variable costs.
He points to two areas where costs have increased since the grain price hike in 2008 – rents and machinery costs.
“There have undoubtedly been a number of growers who have paid strategically high rents in the hope of securing extra land for the long-term, but anyone who has paid £200/acre will be finding margins are very tight at the moment. Meanwhile, there is a danger of machinery overcapacity on farms and I would urge all farmers to have a look at their horsepower per hectare, per labour unit and even per tonne figures to identify where savings can be made.
“It is important to keep machinery passes to a minimum, but I can understand growers may this year have wanted to make the most of the almost ideal establishment conditions to tackle black-grass culturally or improve their soil after three very difficult years. That long-term maintenance of the farm makes sense, but it needs to be properly costed out.”
Necessity is the mother of invention and Mr Gemmill expects more farms will revisit the ideas of joint ventures, equipment sharing and contracting as pressure on returns increases.
“One area where significant savings of up to 15% to 20% can be made is in the group buying of such essentials as fuel and fertiliser, while grain pools could either add some value to the crop, or at least remove some of the volatility.”