Making calculations while feeling stuck in the middle of politics
At Hustings meetings I attended before the election, prospective Parliamentary candidates often referred to the ‘squeezed middle’ – a group of potential voters they were enthusiastic to engage with, all promising to resolve their problems and increase their prosperity in return for their vote. Farmers clearly identify with this group, finding themselves compressed relentlessly between merchants and processors who buy their output, while striving to push back against suppliers of inputs, machinery and finance, all essential purchases to ensure production is maintained.
Agriculture has experienced a squeeze which has removed the life breath from some sectors, with dairy and potatoes being particularly hard hit, but all enterprises have suffered. With the dairy sector often – and quite rightly – making the news, cereal growers have been somewhat overlooked and yet the pressure on margins is persistent and unforgiving; commodity prices are falling while inputs rise or remain static at best.
Latest figures from the Rural Business Research unit using harvest 2013 data from more than 600 farms across England collected by the Farm Business Survey (FBS) showed major crops such as winter wheat, winter rapeseed and spring barley were all produced at a loss, the greatest loss being a net margin of -£265/hectare for spring barley.
Management consultants encourage us to have a firm understanding of our production cost per tonne, a figure which varies greatly across farms. FBS data analysis revealed the variable cost of production per tonne for wheat was £65 across all producers on the basis of an 8t/ha yield. High performers reduced this to £54.19/t against an average yield of 9.3t/ha. However, with FBS calculating the true level of fixed costs across English cereal farms was £832/ha, it took the total cost of production of a tonne of wheat to £169/t for all farms and £143.65/t for premium producers; a salutary tale when compared against the HGCA Corn Returns average price for 2013/14 of £153.30/t.
For rapeseed total production costs for all producers were £429/t (basis: 3.1t/ha), while premium producers reduced this to £338/t (basis: 3.9t/ha). With HGCA data showing an average price of rape delivered in the South East for 2013/14 at £259.40, it is small wonder many growers are agonising over the inclusion of oilseed rape in their future rotations on both a financial and crop management basis.
Input inflation is fanning the flames caused by falls in commodity prices. Analysis of my farm accounts show some chemicals have increased by 22% over the last 12 months, while others have seen an increase of 72% in just three years. Fertiliser accounted for 42% of winter wheat variable costs in the FBS survey, which explains the frustration felt by growers prices have remained stubbornly high.
Many will be expecting some significant re-alignment for the forthcoming season.
So how can we manage the situation and what can we do? We have little, if any, control or impact on world commodity prices; at best we can use management tools to reduce our risk to negative market movements. But we can take an active interest in, and try to influence all factors, which can have a direct financial impact on our production cost. We must make strong, reasoned arguments against policies, which if implemented, will impact on our cost of production – both those which directly increase costs or those which inadvertently limit our potential output.
So if you, like me, feel part of the squeezed middle, make sure you calculate and know your production cost per tonne, thereby enabling you to make informed management decisions. In the meantime, we must all examine our costs and be in a position to lobby against anything which unnecessarily increases our cost of production, particularly where it disadvantages us against other producers from around the world.