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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:

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