Loam Farm Model

Cereals profitability will be reduced on many farms for harvest 2012 due to the past year’s weather.  But the financial effects may be more severe for the harvest 2013 year.  This is illustrated by the figures from Andersons’ Loam Farm Model which have been updated for the Cereals Event which will be held at Boothby Heath near Lincoln on Wednesday 12^th and Thursday 13^th June.

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 unprecedented weather over the last 12 month means it is far harder to generalise about the fortunes of cereals businesses than usual.  For example Loam Farm is notionally located in Suffolk where conditions have not been as wet as those faced by producers further west and north.  For this reason, different versions of the model have been produced this year to fully illustrate the physical and financial prospects for the sector.  One is for the normal East Anglian farm but an alternative has been produced to show the effects where the weather has hit harder – in the west and north.

In the eastern model it can be seen that for all four years shown there is a positive margin from production.  This has not generally been the case in the previous two decades.  Despite avoiding the worst of the weather yields and quality for harvest 2012 were still affected – reducing the margin despite better prices.  The farm has planted its winter crops for 2013 but their condition is not good and this is forecast to depress yields.  Profit for 2013 is expected to drop compared to 2012.  For 2014 yields will return to normal levels, which will help return some profitability.  However, there is an additional significant rise in rental costs. Loam Farm has two FBT agreements and one comes up for renewal in autumn 2013.  Despite the struggles of combinable cropping businesses over the past 18 months the current rent of £120 per acre (£300 per hectare) is still below the ‘going rate’.  To secure the land an increase to £150 per acre (£370 per hectare) has been agreed.  This has pushed up the Rent and Finance charge on the farm.

Looking at the figures for the west / north version of the model, they start in the same place as the standard Loam Farm with a very good 2011 year.  In fact, this was the highest ever recorded profit.  The differences start in 2012 with greater yield and quality drops plus extra spray programmes required.  However, the high prices received offset some of this.  The margin from production was about at break-even level and the business suplus fell by 42% compared to 2011 – obviously not good, but probably not as bad as the year felt to many farmers.

As with many businesses, this model struggled to establish crops for harvest 2013.  It has some fallow land, more spring cropping, and the yield potential of the crops that are there looks low.  There are some variable cost savings (spring cropping and fallow land) and some capital investment has been deferred (lower depreciation).  However, with output prices looking set to be lower than last year, the effect on margins can be seen.  In fact, profitability drops to a significant loss before support from the Single Payment and ELS.

It is not until 2014 that ‘normality’ in rotation and yields is restored, with the figures again equivalent to the eastern model.  Even with the recovery, however, rising costs and lower forward sale prices mean that the profitability high point of 2011 is not regained.  Through the rest of 2013, and probably until harvest 2014, many combinable crop businesses are likely to face unusually high pressure on their cashflows.  This will be exacerbated by a drop in the Euro value of the Single Payment by at least 5% and possibly more for 2013 which has been covered in past Bulletins.

To illustrate the wide variability in profits between farms it is instructive to compare the profits of the west /north business with the ‘standard’ Loam Farm model in the east.  Over the two harvests 2012 and 2013 the weather-affected business is forecast to make £146,000 less than the East Anglian one which had more normal growing conditions.