Going round in circles?

The Background to the issue

• It is difficult to track, quantify and assess the fast moving prices and costs of the arable margin
• Recent harvests have not been sufficient to maintain most arable businesses in a viable position with many delaying machinery purchases and living off their depreciation.
• The general lack of profitability has driven many to restructure through contract farming agreements and more recently by setting up labour and machinery syndicates.

Current progressive farm Structures

• A typical machinery syndicate will consist of
  • 3,000 to 5,000 acres consisting of 4 businesses
  • Machinery held in a Limited Liability Partnership
  • Managed by the son of one of the businesses usually aged early thirties
  • Value of machinery per acre around £120 to £150
  • One combine backed up by a contractor if required
  • Whole area block cropped
  • Gross margin on all crops equalised between the businesses
• These syndicates have resulted in driving down the costs of labour and machinery per acre from an average of £131 per acre and Top 25% of £118 per acre down to an average for syndicates of £96 per acre for the 2007 harvest.
• These restructured businesses should now be well placed to capitalise on the arable price increases however have these price increases been exhumed by higher input costs?
• Wheat is 55% of the arable area in the Grant Thornton Top 25% group therefore the impact of the wheat gross margin can be assessed.
• Input costs of seeds, fertilisers and chemicals on average increase by 58% from 2006 to the 2009 harvest.
• The wheat margin for the 2006 harvest for the Top 25% group was £173 per acre (average was £141) and this increases to £286 per acre for the 2009 harvest - an increase of 65%
• However fuel costs are likely to rise from £19 per acre to £39 per acre - an additional £20 per acre or 105% over the 3 year period. Add to this an average 4% overall increase in fixed costs and the impact on the Net Farm Income is an overall increase of £57% from 2006 to 2009.
• However it can be argued that the £134 is not a sustainable figure to fund farmer drawings, tax, capital repayments on loans and reinvestment. Therefore if the 2007 harvest Net Farm Income of £237 is taken as a benchmark then the results are a reduction in profitability from £237 per acre to £210 per acre - a reduction of 11%
• With increased costs eroding the higher prices the focus must not be taken off streamlining businesses, maintaining a balance between
  • cost reduction
  • timeliness and efficiency
• The use of machinery must be flexible in modern farming businesses as areas may change from season to season
• High HP tractors used for short periods in the autumn may be better hired
  • to remain flexible
  • reduce capital tied up
  • tax relief on rentals
  • access to up to date models

Information and financial examples supplied by: