How to bolster financial resilience on farm

Recent Budget changes, including to agricultural property relief (APR) and business property relief (BPR), have only added to the inherent financial stress on farms.

Challenges have included reduced Basic Payment Scheme (BPS) support, a difficult growing season, and poor returns on livestock units.

Other Budget announcements of higher employer national insurance contributions and an increased minimum wage are contributing to the cumulative impact of a struggling sector.

Input costs are generally higher and commodity prices have fallen back from the highs of a couple of years ago.

While the changes to APR and BPR for many farms might be the longer-term threat to financial viability, the reduction in BPS especially will hit farm cashflow hard in the short term.

Aa maximum payment of £7,200 in 2025 will represent an unexpected, and for some, significant reduction in income.

See also: How farm businesses can borrow wisely

Farm Business Survey indicators

Official figures in the latest Defra analysis of profitability and resilience of farms in England using data from the Farm Business Survey ­suggest there is financial resilience within ­agriculture, underpinned by a large asset base.

For example, the average gearing ratio – an accounting measure which expresses a farm’s liabilities as a proportion of its assets – was 12% in 2022-23.

This figure is largely unchanged from the previous 10 years, while liquidity, a measure of short-term financial viability has increased to 321%.

A figure below 100% would mean a farm is unable to meet its immediate financial demands using current assets.

The analysis also shows an 8% increase in the average level of debt to just under £300,000, with an average return on capital employed of 0.5%, which had halved from the previous year.

But the data is from a year when reductions in BPS were only 20% on average, compared with the 75% plus cut for the coming year.

Farm business consultants point towards the reduction’s impact on cashflow as being the most immediate factor for farm businesses to consider, alongside low returns, on their financial resilience.

Cash requirements

A key aspect of financial resilience is generating sufficient cash, not necessarily profit, to meet your obligations, such as loan repayments, hire-purchase agreements and personal drawings.

With the reductions in BPS support, he fears that more businesses, while appearing profitable on paper, will struggle to meet their financial obligations.

Consultancy GSC Grays’ debt serviceability ratio calculations – how much cash is being generated by the business relative to what it requires to pay obligations – are showing a disturbing decline in the ability to cover debts.

© Tim Scrivener

Farm business consultant Robert ­Sullivan of GSC Gray says one example of a business he is working with now has only 1.09 times cover compared with 1.56 times last year.

“This means the business is only just generating enough cash to covers its debt repayments and interest charges.

“And that’s fairly typical depending on how problematic your harvest was – in this case the poor harvest cost the business £120,000 in lower grain sales.”

Historically, for most farms when the safety net of BPS was in the system withstanding a poor harvest hasn’t been too much of a problem.

However, the loss of BPS income has reduced the ability of farms to withstand such shocks.

That’s also the case in livestock units, including those in upland areas, Robert says, where the loss of BPS is outweighing any increases in margins from recent higher prices.

Farm review and budget

Conducting a comprehensive farm business review is a crucial first step towards understanding the farm’s financial position.

A key initial element is to agree a long-term vision for the farm, including considering succession, lifestyle preferences and the aspirations of the next generation, says Agrovista rural business consultant Lewis Butlin.

Once farm objectives are agreed, analyse accounts, use benchmarking, and produce annual cashflows and budgets to help assess profitability and pinpoint areas where improvements can be made.

While budgeting can be notoriously difficult and inaccurate, Robert says it is worthwhile doing rather than relying solely on annual accounts that reflect historical data that is often 18 months old.

That can then be used as a live document to use and review regularly to help make decisions more quickly in response to events, he says.

© Tim Scrivener

Jonathan Armitage, Strutt & Parker’s head of farming and natural capital, agrees that preparing a budget is helpful. “It allows you to start to measure your resilience against various factors.

“For example, what is the impact on the business if the price of wheat goes to X or the fertiliser price to Y, and how prepared is the business for these eventualities?

“Starting to do that kind of sensitivity analysis helps show where the boundaries are and develop risk management strategies further.”

Establishing a reference point for grain sales and then looking above and below, can be a useful tool to manage sales.

“If it meets my target, I will commit some sales that month, and if the price goes above, I’ll increase that amount.

“Equally, I will also sell more if the price goes below my lower threshold as a protection strategy because I can’t afford it go any lower,” he explains.

Benchmarking

Benchmarking is another tool that helps businesses understand their relative financial or technical performance.

The AHDB’s head of benchmarking, Derek Carless, says tools such as FarmBench can help compare performance at a basic level.

For instance, you can compare from year to year and take a detailed look at specific crops or enterprises compared against similar types of businesses or from the same geographical location.

The data helps businesses understand how they measure up and what areas might be dragging down overall performance.

Anonymised, aggregated data helps the AHDB understand how the whole sector is performing and informs its activities.

To maximise the benefit from the data, Derek suggests joining an AHDB business discussion group.

“You can learn from each other, talk through problems and potential solutions. Other farmers are some of the best people to check your thinking and share experiences.”

Within the arable sector, 65% of farmers have implemented changes as a result of attending such sessions, 52% have saved money as a result, with 17% saving between £10,000 and £20,000, Derek says.

Such analysis can pave the way for critical evaluation of the current farming system, Lewis says.

That could mean switching from an intensive system to a more extensive one, reducing labour and input costs, evaluating the feasibility of contract farming, or deciding to focus on a specific profitable enterprise and stopping one that underperforms, he explains.

Comparisons of top and bottom performing farms in different sectors by the AHDB and The Andersons Centre also give indications of how performance could be improved (see table).

That evaluation of Farm Business Survey highlights the top 25% of beef and lamb, arable and dairy farmers make between £50,000 and £120,000 more than the bottom 50% of farmers.

While some factors are not surprising, such as cost management albeit with subtle differences between sectors, the analysis also points to less obvious solutions, such as greater use of contracting within top performing farms.

Take up of agri-environment schemes is changing. In the dairy sector, bottom performing farms have historically taken more agri-environment income per hectare where the fixed income is more attractive to loss-making farms.

But rewards for good practice that can be added with no change in practice is attractive to all farms.

“Investigate whether there are opportunities to increase income through greater SFI schemes without changing much,” Robert advises.

“For example, if you’re growing oilseed rape, planting a summer cover crop after the rape is harvested before the following wheat crop gives an extra £163/ha.

“And if you commit to doing that now, you start getting payments in advance of incurring any costs, which will help with cashflow.”

Investments

Future investment will likely be closely scrutinised in future, Jonathan believes, in the current climate.

But while cutting back might seem the logical response, careful evaluation of the long-term impact of delaying or foregoing investment opportunities will be crucial.

Delaying the replacement of a key piece of machinery, for example, could lead to higher repair costs and downtime in the future, offsetting any short-term savings.

Prioritise investments that enhance resilience, Jonathan advises. This might include investments in drainage, storage or efficient livestock handling systems.

“There are areas where significant investment can improve resilience significantly. Storage allows you to weather short-term movements in price.”

Managing a team

The people factor and the farm’s management is often a consistent factor in success rather than the same crops, soil types or productions systems.

This has been highlighted in research carried out by Strutt & Parker and AHDB into top performing farms.

“If you look at some of the behaviours of those managing those businesses you find all sorts of commonalities, which is reassuring, as it shows the secret to performance is mostly management,” Jonathan says.

Among those behaviours are putting together a great team.

“Not just the employees but the wider team of advisers, grain traders, agronomists, accountants, solicitors, business advisers and customers.

“They are all treated as part of the team to produce an outcome led by the manager or owner, who takes on various views and advice, and then makes a decisive decision.”

Other key characteristics include excellent communication and attention to detail on everything, he stresses.

Developing management skills is sometimes overlooked within farming, Derek suggests.

Management development programmes

“AHDB runs an AgriLeader programme that focuses on developing the individual and what they need to succeed in the challenging environment we’re facing at the moment,” he points out.

Robert adds that other opportunities for development can also be found through:

• The Worshipful Company of Farmers
• British Institute of Agricultural Consultants and Institute of Agricultural Management
• Nuffield Scholarship

“These provide opportunities for self-betterment in areas that you don’t necessarily come across on a day-to-day basis,” he concludes.

For more information, visit the AHDB’s Knowledge Library.

Transition farmer: Eddie Andrew

Eddie Andrew © Our Cow Molly

Investment into new infrastructure designed to improve financial resilience on Eddie Andrew’s dairy farm is now a double-edged sword, following the recent proposed inheritance tax changes in the Budget.

Eddie and his family hatched plans in 2020 to build a new milking parlour, with robotic milking systems, an anaerobic digester and solar panels on the farm on the outskirts of Sheffield.

Representing a large financial commitment, the new barn, plus underground slurry stores, will improve efficiency and reduce reliance on external energy sources.

Energy needs almost crippled the business during the price hikes at the start of the Ukraine war.

“Once the anaerobic digester is running the farm, hopefully, should be completely off grid, which will insulate us from market fluctuations and power cuts,” he says.

In addition, the plans also involved helping to fill a gap that exists in the supply of green energy.

“The plan is for the roof of the barn to be covered in solar panels, with the energy powering an electrolyser to produce green hydrogen energy.

“We could produce enough green energy to power 144 buses every week.

“But every day we’re investing money in concrete and building this new shed, we’re just building ourselves a bigger and bigger asset to be taxed on,” Eddie notes.

Some thought is now being given to whether the family should abandon the project.

Eddie is still hopeful some compromise will be made to the policy to lessen the impact on family farms, while still targeting those using agriculture as a means of tax avoidance.