Loam Farm Update

Ahead of the CropTec show at Peterborough on the 19^th and 20^th November, the figures for Andersons Loam Farm have been updated.  This notional business has modelled the ups and downs of arable profitability since the early 1990’s.  The latest figures confirm that   cereals profitability is currently on a downswing.

To recap, Loam Farm comprises a 600 hectare (1,480 acre) combinable crop farm located in East Anglia.  It has a simple rotation of winter milling wheat, winter OSR, winter 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.  All operations are carried out in-house.  The figures for the past two harvests are shown, and then a budget for harvest 2015.  The figures for 2014 are still provisional as there is some grain still left to sell.

It can be seen that profitability has reduced since harvest 2013.  (Being in the east, Loam Farm was less affected than other farms by disruption to cropping for harvest 2013 caused by the wet autumn of 2012).  This is largely a result of falling prices.  Although variable costs have reduced slightly since 2013, mainly due to lower fertiliser prices, the gross margin has declined.  Added to this is a rise in overhead costs.  Although some costs such as fuel have fallen, this has been more than offset by other rises – particularly the increasing price of machinery driving up depreciation.  Finally, the rent and finance figure has gone up markedly.  With base rates low, it is not finance that has driven this, but rents.  Loam Farm has two FBT agreements, one came up for renewal in autumn 2013, the other in autumn 2014.  Despite falling profitability, the business was faced with paying ‘the going rate’ in order to retain this land, and rents have increased.

All this means that the current budget for 2015 shows the business making a substantial loss per hectare before support.  The introduction of the BPS in 2015 sees that support drop.  Loam Farm’s ELS agreement also ends during the course of the year – further reducing income.  Overall, profit is at a third of the level seen two years ago.

Continuing on the subject of rents, the market for FBTs appears not to have yet caught up with the current realities of cereals profitability.  We still hear many cases of tender rents of over £200 per acre (£500 per Ha) being offered for fairly ordinary cropping land.  To illustrate the point we have done some further analysis on Loam Farm.  The final column in the table shows the budget if Loam Farm had taken on a further 200 hectares (500 acres) on an FBT this autumn.  The rent is £500per Ha (£202 per acre) on the extra land.  Other assumptions are;

• The same rotation is followed on the new land as is on the existing land.  Yields are in line with existing Loam Farm.  (This is actually quite a generous assumption as experience suggests that the extra land will not generate an equivalent gross-margin.  This is partly due to loss of management focus over a larger area, and partly due to the let land not being in ‘good heart’.)
• Fuel and machinery costs rise in proportion to the land area.  (Again, generous –much extra land is taken at some distance to the main holding increasing the time taken for operations)
• Additional finance costs are incurred on the extra working capital
• Short-term contract storage is purchased as there is no storage on the rented unit.  There is some additional machinery purchased, and extra harvest casual labour
• No Stewardship payments are received on the extra land, but the BPS is claimed

This analysis of expansion was undertaken two years ago when arable profits were higher.  At that point the margin per hectare went down but, thanks to the extra area, total business profits actually went up.  At that point it could be argued that expansion was worthwhile as it did generate a bigger return.  Now, it can be seen that taking on the extra land actually reduces business profit.  Many real-life business will be finding themselves in this situation as a result of not doing their calculations thoroughly before tendering for extra land.