Outlook 2023: Current cropping profits not future-proofed

Unexpectedly high profits from the 2022 harvest will be seen in bank accounts this autumn. The extra profit is the result of crops sold onto markets after the Ukraine conflict began which were grown using fertiliser bought largely at pre-invasion prices.

For many, this will come after a very profitable 2021 harvest year, say Andersons authors Sebastian Graff-Baker and Joe Scarratt.

However, this situation is very much a snapshot of the combinable cropping sector’s fortunes.

See also: Farmers’ tax averaging – how does it work?

A look beyond current circumstances is needed, with a focus on the key factors that determine profitability to accurately assess underlying prospects, particularly those that lie within the grower’s control.

Thought must also be given to how profitability is measured and, indeed, over what time period.

As an example, 50 years ago marked the founding of farm business consultants Andersons. Comparing figures then and now shows that underlying profitability remains in decline.

In the early 1970s, the wheat price was about £28/t (excluding deficiency payments of £24/ha) and typical yields averaged 4-4.5t/ha. This, together with straw receipts, created a total wheat output in the region of £132/ha.

Fifty years later in 2022, the prospect for the same hectare of wheat is a yield of more than 9t/ha selling for, say, £250/t. With yield doubling and prices up ninefold, is the UK combinable crop grower better off?

In 1972, 44-50% of the sale value of wheat was spent on costs to get it into store – growing, labour and machinery costs.

Today, despite huge increases in yield and price, combined with a substantial reduction in grower numbers, those costs now account for 55% to 60% of the wheat price.

Given that wheat, together with the other combinable crops, is a basic commodity, it is perhaps no surprise that underlying profits are shrinking.

After all, that 1972 sale price of £28/t is equivalent to £296/t today, according to the Bank of England’s inflation calculator.

Reinvestment caution

Returning to the current situation, the now “permanent” £1m annual investment allowance will lead many growers to apply recent high profits to reinvestment in equipment.

It may make sense for some to bring forward slightly some reinvestment decisions. However, changing kit focused solely on reducing an annual tax bill will inevitably add to operating costs and, more importantly, deplete cash required for balance sheet growth elsewhere.

The effect of inflation has increased the working capital requirement (and the associated risk) of combinable cropping. Uncertainty surrounding future fertiliser availability has encouraged many to secure harvest 2023 supplies early, as well as 2024 harvest fertiliser, for some.

Commitment to buying fertiliser at three to four times the 2021 price would logically point towards a corresponding commitment to sell a proportion of the harvest at a price that should generate an acceptable level of profit with a manageable level of risk.

Making buying and selling decisions on the same day in the same market environment is now more important to manage that risk.

The increase in working capital requirement may require some growers to commit to a higher level of security where funds are borrowed, resulting in an increase in finance costs.

However, where cash surpluses exist from 2022, the opportunity to reduce long-term borrowing should be taken where appropriate.

High output and input prices, compared with historic averages, exacerbate what is already a wide range in financial performance between the good and the very good growers.

The range in performance is growing, as we have previously said. When key input and output prices soar, the additional profit from attention to detail (effectively output per unit of input use) is clearly seen (see chart).

The importance of soils

The perhaps simplistic analysis of the underlying profit trend over the past 50 years overlooks one key input and the associated cost – an input that has exercised a few for many years and is now becoming a priority for us all.

While we share the climate, our soils reflect the underlying geology of the particular farm, together with its recent management. As an industry we have, on average, depleted soil organic matter – albeit inadvertently.

This has resulted from the increased use of synthetic crop nutrition and crop protection products and, perhaps, excessive cultivations, without maintaining the beneficial effects of grazing livestock and crop diversity as part of a wider rotation.

In the past this has been based on commercial logic, assessing combinable crop profitability only using the convention of annual profit and loss, without placing a cost on the reduction of soil organic matter.

Ironically, the potential changes in working practices required to stop the decline and improve soil health may be something that the market is willing to support just at the same time as the industry is becoming increasingly well-informed on soil health.

There are the beginnings of farming businesses being paid to sequester carbon in order to help reduce atmospheric carbon dioxide emissions, using soils that have low levels of carbon as a result of past farming practices.

Clearly one of the key issues is to find the balance between continuing to produce combinable crops in a way that generates profit from year to year, while delivering a reward from sequestering carbon and, in doing so, increase the health of soils.

With the right management this, in turn, should improve yields and, ultimately, profitability. Restoring soil health is a long-term undertaking which, as an industry, we need to buy into at all levels, not least in terms of land tenure/security.

Andersons has previously outlined that a move to regenerative farming often requires an “investment” in terms of a period of lower business returns. This may be an appropriate time for some to make that investment.