Farm profit forecasts point to focus on fixed costs

Fixed costs offer the greatest scope to improve financial performance on combinable crop farms.

While yield plays an important part, control of overheads sets the higher performers apart.

Forecasts using standard and higher performing data for in-hand farms show that the 2023 harvest will produce a big drop in profits, with a slight recovery for the 2024 crop.

However, that recovery still produces “worryingly low” returns, says Andrew Atkinson, farm consultant with Strutt & Parker.

The net margins of higher performing businesses in 2024 are expected to be more than 75% greater, at £422/ha, than those of average performing farms, at £237/ha.

See also: Steep price rises put focus on machinery costs

“While a higher wheat yield from these farms improves financial output, it is the lower level of fixed costs that makes the greatest difference (£597/ha versus £475/ha), which is due to quality of farm management,” Andrew says.

A tool developed by Strutt & Parker’s farming and research team helps assess the sensitivity of arable net margins to changes in some of the main variables, such as fertiliser and diesel costs and crop sales values.

Using the 2021 harvest year as its baseline, this compares income, expenditure and profits, initially using a universal set of assumptions for average and higher-performing in-hand arable businesses.

The fixed-cost figures are broadly based on Farm Business Survey (FBS) data. 

Yields for the higher-performing business are 9t/ha of wheat, 7.6t/ha of winter barley, 6.2t/ha of spring barley and 3.1t/ha of oilseed rape.

It also has lower fixed costs typical of the best arable businesses, at £397/ha.

The variable costs in the 2021 baseline data are the same for both the average and higher-performing farms, with the better performance coming from using inputs more effectively, as well as lower fixed costs.

2023 net margins

With both fixed and variable costs rising, Basic Payment Scheme (BPS) dropping and lower crop receipts (the model uses £200/t for 2023 wheat sales), the 2023 crop average net margin falls to £183/ha, which is 60% lower than the 2021 baseline.

The net margin for the high-performing business is £364/ha, a 41% drop compared with 2021.

However, these margins are before interest and any imputed rent charge, and the average working capital demand grows to £173,614 or £1,325/ha for the 131ha example farm (FBS average cereal farm size), a full 40% higher than in 2021.

The higher-performing business sees a 43% greater working capital requirement, at £158,598 or £1,211/ha.

© Wolfilser/Adobe Stock

2024 estimates

Strutt & Parker is currently budgeting for a cut of almost 25% in seed, spray and fertiliser costs for 2024 crops, based on the recently announced new season UK ammonium nitrate price and an expectation that spray costs will stabilise.  

However, the budgets also allow for crop sales prices to reduce further, to about £190/t for wheat, reducing total crop receipts (all crops) by 6%.

This results in 2024 “standard” net margins rising to £237/ha for an average in-hand farm, and to £422/ha for the higher-performing business.

“Due to the reduction in input costs, working capital requirements are lower than in 2022 and 2023 but are still 24% higher than they were in 2021,” Andrew says.

The estimates should give cause for thought and a more frequent revisiting of budgets than most managers might usually do, he says.

Options

“It’s a luxury to have the time to think strategically, but it’s best to give yourself that time if you can, so that you can consider a range of options based on ‘what if’ scenarios, rather than being forced into what seems like the only option at a certain time.”

Examples of limited options might include a key person leaving, becoming ill or retiring and the employer finding it difficult to replace them.

“If you game-plan possible situations, you can consider options such as whether you need to replace a machine, use contractors, or approach a neighbour to share machinery and/or labour.” 

The S&P tool offers the option to change variables including rotation, areas grown, yields, input and output prices so that the results can be produced for individual businesses, whether for in-hand, let land or contract farming agreements.

With costs rising, BPS dropping and crop sales receipts falling, the 2023 “average” net margin falls to £183/ha, which is 60% lower than the 2021 baseline.

The net margin for the higher-performing business is £364/ha, a 41% drop from the 2021 baseline.

Working capital requirements continue to rise, to £1,325/ha, or 40% higher in 2023 than in 2021 for a standard farm with 131ha of arable crops.

It will fall for the 2024 crop to £1,175/ha, but will still be 24% higher than in 2021.

Potential improvements to net margins

• Further announcements on Sustainable Farming Incentive (SFI) options are expected this month – potentially to include extra payments for direct drilling, no use of insecticides, precision farming approaches and companion cropping. These could add about £60/ha to a business’s net margin.
• Any disruption to the Black Sea grain corridor agreement, recently renewed for just two months, could push grain prices back up.
• The natural gas price is down 88% from the highs of August 2022, providing a much lower ammonium nitrate price than seen this time last year, when the gas price was close to its peak.