Arable Farm Profitability Drops

With harvest completed and (most) crops planted many cereals farmers will now be taking stock of their financial position.  Our Loam Farm has done the same, and the results do not make for hugely cheerful reading.

To recap, Loam Farm is a notional business which has been running since 1991 and tracks the fortunes of combinable cropping farms.  It comprises a 600 hectare (1,480 acre) combinable crop farm in East Anglia.  It runs a simple rotation of milling wheat, WOSR, feed wheat, and spring beans.  Of the cropped area, 240 Ha are owned and 360 Ha rented on FBTs.  There is a working proprietor plus one full-time man and harvest casual.  The figures for the past three harvests are provided below, along with a budget for 2014. 

The 2012 harvest showed a substantial fall in margin compared to the (admittedly record-breaking) 2011 harvest.  What might be more of a surprise is that the provisional result for harvest 2013 shows a further, quite sizeable, fall in profitability.  Although yields were not as bad as looked probable in the spring, the rapid fall-off in prices since harvest 2013 has meant that returns look set to be lower than last year.  Like many farms, because there was so much uncertainty over likely yield levels early in the year, Loam Farm sold less grain forward thanusual – meaninga greater proportion will have to be marketed at the prevailing ‘spot’ prices.

Looking to harvest 2014 things do not improve.  Yields are budgeted to recover to ‘normal’ Loam Farm levels.  However, current lacklustre forward prices mean that, overall, output is similar or even a bit down on the 2013 harvest.  Variable costs fall mainly due to cheaper fertiliser.  Overheads drift upwards, but a big element of cost increase comes through the rent and finance figure.  This is due to rent increases.  Loam Farm has two FBT agreements and one came up for renewal in autumn 2013.  Despite the struggles of combinable cropping businesses over the past 18 months the previous rent of £120 per acre (£300 per hectare) is below the ‘going rate’.  To secure the land an increase to £150 per acre (£370 per hectare) has been agreed – although this would still look ‘cheap’ in many tender situations.  All this means that there is a budgeted loss from production – a situation Loam Farm has not been in for four years.  The business is again reliant on subsidy payments for profitability.

Back in the May Bulletin we outlined how the Loam Farm model had been ‘split’ in the last year.  Because the farm is notionally located in Suffolk, it was not as badly affected by the rainfall in 2012 than many farms further west and north.  Therefore a second version of Loam Farm has been produced, just for the 2012 and 2013 years (2011 and 2014 budgets are identical).  The figures for this ‘Loam Farm – West/North’ are shown below.

The differences from the standard model start in 2012 with greater yield and quality drops.  However, the high prices received offset some of this.  The margin from production was about at break-even level.  The disruption in rotations was greater in 2013 under this model and it had some fallow land, more spring cropping, and generally lower yields than the eastern farm.  There were some variable cost savings (spring cropping and fallow land) and some capital investment has been deferred (lower depreciation).  However, with current output prices the margin from production for the harvest just gone shows a large negative.

For many cereals farmers, the 2013 year ‘felt better’ than 2012 simply because harvest and establishment was so much easier.  However, as both the models show, 2013 has probably been worse in financial terms for most businesses.  The effects of this are still to work through over the next few months as farmers sell what grain they have at relatively low prices and find a cash shortfall.  There may be increasing calls on bank finance.  With crops for 2014 generally planted and looking good, farmers may be feeling positive about the coming year.  However, unless prices improve, the profitability prospects do not look great.  This illustrates the high-cost production systems that many farmers have created, with a large contributory factor being high rents paid.