Top tips on de-risking combinable crops businesses

Stark new figures reveal the financial squeeze combinable crop businesses are facing after six months of exceptionally wet weather, changes in commodity prices and falling Basic Payments Scheme payments.

Strutt & Parker has updated its harvest 2024 arable profitability forecasts which show that the estimated net margin – which is the equivalent of profit before rent and finance – for an average–performing business has fallen to £80/ha.

This is 60% lower than in 2023, which itself was a year in which net margins dropped significantly on the previous couple of years because of high input costs.

Although variable costs have fallen considerably this year, mainly due to lower fertiliser prices, income from crop sales is forecast to be down on 2023 levels, due to expected lower yields.

“The impact of the weather has been felt everywhere, but some areas are clearly worse affected than others and different soil types will also have an impact, so in that sense farm profitability is somewhat of a postcode lottery,” says Jonathan Armitage, head of farming for Strutt & Parker.

“It is also worth noting that our estimated net margin for a higher-performing combinable crops business is much higher at £271/ha – based on the assumption that they will achieve higher yields than the average business with lower fixed costs.

“However, this figure is still significantly lower than our 2021 baseline when the net margin was £622/ha.”

These estimates highlight both the value of applying forensic attention to detail to your farming business and the need to actively manage risk, according to Jonathan. 

Adopting behaviours that get businesses into the top 25% of performers – such as budgeting, focusing on marginal gains, and reducing machinery costs – is not a new message, but is more important than ever in this business environment.

“So, too, is actively and consciously managing risk, given the amount of capital required by growers has increased significantly over the past couple of years because of input cost inflation, and higher interest rates have made this capital much more expensive.”

Competitive finance deals

Our analysis shows that the working capital alone required by an average business with 131ha cropped in a typical rotation (the average-sized business according to Farm Business Survey data) has gone from about £125,000 in 2021 to close to £157,000 in 2024.

In addition, the costs of machinery and equipment have risen, and many farms also have to factor in significant advance rental payments.

This is one of the reasons why interest in Strutt & Parker’s new Financial Brokerage service is growing as people seek the most favourable terms for funding their businesses.

The brokerage service team – which is led by Strutt & Parker’s deputy head of rural Karl McConville, who is a former banker – has relationships with every major lender in the rural and agricultural sector. 

“Shopping around for the best deal and getting the right financial structures in place is becoming an increasingly complex process with businesses often needing specialist advice to guide them through the process,” says Karl.

“We can secure farmers the most competitive funding available by getting quotes from the whole of the market and making sure their request is structured in the right way to get the best possible deal.

“For example, we recently worked with a client who was very unhappy with the level of service they were getting from their bank as it had removed access to a local manager which was making running their business difficult.

“We introduced them to a new relationship-led bank and delivered cost savings in the process.”

Reducing costly losses

The Sustainable Farming Incentive (SFI) is currently the big talking point in the English farming sector and can be a valuable tool in the box in terms of implementing a more active risk management strategy.

It allows growers to take out the worst-performing areas, or lowest-margin crops within a rotation, and replace them with a fixed return with almost zero risk.

“While the return may not be as good as that produced by a really good crop, it does avoid the risk of costly losses,” says Jonathan.

“Taking this approach should also mean that growers can focus their efforts on the more profitable crops in the rotation, managing them in a more timely fashion to make them even more profitable.”

Of course, farming is a cyclical business and there are good years and bad.

This means farms which choose to minimise risk by focusing on increasing their fixed income sources will reduce the opportunities to take advantage of any upsides when they come.

Business structures

Higher-performing businesses have lower overhead costs per hectare, which is largely down to lower machinery costs, although their labour, property and administration costs also tend to be lower because resources are being deployed more efficiently.

If businesses are reducing their cropped area, they will need to look for ways to reduce their fixed costs with possible solutions including machinery sharing and greater use of contractors or alternative business structures such as a joint venture or a Contract Farming Agreement.

Other strategies for reducing risk might include taking a different approach to crop marketing to reflect the greater production risks growers are now facing.

Spotting opportunities to sell into special markets which deliver a premium is another possibility.

Private healthcare

When it comes to maximising farming productivity, we also know that having the right people in place is vital.

Research consistently points to the top-performing businesses being led by, and employing, people who have a mindset which is open to change, an attention to detail, a focus on marginal gains and who are constantly looking for new opportunities. Losing such people is clearly a big risk factor.

“Motivating and rewarding staff and family members appropriately can have a big impact on efficiency and staff retention so that needs to be a priority.

“Having a staff member unavailable for a long period because of illness or injury can also be incredibly difficult, so some farming businesses are now offering private healthcare as part of their financial package,” says Jonathan.

“Volatility is here to stay, but by identifying, assessing and then addressing threats farmers can put themselves in the driving seat of their businesses and shield themselves from the worst of the impact.

“Our specialist Farming team can help to carry out an independent review of risk exposure across your business and devise an action plan towards a sustainable and profitable future.”

If you would like to know more contact jonathan.armitage@struttandparker.com or karl.mcconville@struttandparker.com