Outlook 2024: Large shift in economics of combinable cropping

The contrast between the past two years is stark, with the input/output price equation undergoing a complete reversal.

Modest margins from the 2023 harvest may have been hidden by the better sale proceeds of 2022 harvest crops.

Bank positions generally improved on the back of those sales, so in some instances the difference in profitability between harvests 2022 and 2023 may only be starting to become clear, say Andersons authors Sebastian Graff-Baker and Joe Scarratt.

See also: Delinked payments: Advice on transfers, land sales and FBTs

In 2024 Basic Payment Scheme (BPS) payment rates will be no more than 50% of those at the start of the transition period.

Reductions to date have been mitigated by two largely good harvests and some modest additions from the Sustainable Farming Incentive (SFI) for early adopters.

As re-investment needs rise, along with interest rates, the economics of arable farming are shifting significantly.

Our Andersons model combinable-cropping business, Loam Farm, illustrates this point. The figures are not a specific budget for 2024, simply what the future might look like without BPS.

This outlook is quite different to recent history and assessing viability for the long term requires focus on some key areas.

Finance

The amortised cost of borrowing (interest and capital) is almost double that of two years ago. This has completely changed the equation for new long-term propositions, like taking on additional land or investing in infrastructure.

For those with core debt on variable rates, interest charges have increased significantly, as has the cost of funding working capital and machinery.

We have calculated a full finance cost for Loam Farm as an illustration (see table below).

It assumes a 7% interest rate with all working capital (variable costs and overheads) being funded, on average, for half of the cropping year, and that all machinery is financed.

The total interest cost, excluding any borrowing for fixed infrastructure or land, equates to £120/ha. That is almost as much as a typical cereal farm’s total labour cost.

One underlying issue is that on some soils or fields under some management practices, it is often not possible to achieve low enough costs of production to avoid losses.

With the right data and adequate attention to detail, targeting working capital only on areas that can grow cash crops economically will help ensure finance costs are only incurred on land that can afford to pay.

Labour, power and machinery costs

Many growers still operate with a level of overhead capacity – machinery and, perhaps more so, labour – far greater than can really be justified.

This is the key area in determining the profitability of arable farming and where we see the greatest variations in expenditure between producers.

The target expenditure range, including family labour, should be 30-35% of turnover for most combinable cropping businesses.

In practice we see a much wider range, from below 30% to as much as 45-50% of turnover.

The most significant contributor to these costs is likely to be machinery depreciation.

This is often incorrectly calculated, particularly given complications of profits on disposal when machinery is sold, or the balance of use between enterprises.

Far too many react to tax or repair issues when making buying decisions, rather than having a replacement plan to know the cost.

Such an exercise can also consider the alternatives to ownership such as hire or machinery sharing.

We are likely to see more machinery sharing in the future, particularly for businesses that reduce cropping areas to introduce environmental management measures.

There are many good examples of challenging the convention, whether it be the balance of own and others’ resources, sharing overheads, enterprise mix, or at smaller scales, a system to allow off-farm work where a full-time person is not justified.

Rotation and risk

There is a continuing need to reassess rotations.

Many growers have now realised that spring cropping is not as dreadful as first feared and can lead to longer-term gains, a significantly lower cost base (herbicides, machinery and labour), less risk and greater resilience.

Spring cropping can also integrate with new environmental break crops available through Countryside Stewardship and SFI.

Given the challenges of growing oilseed rape and the often-variable financial performance of pulse crops, a central question for many growers is what proportions of cash and environmental break crops they need in the rotation.

Stopping unprofitable work will be a challenge. Without accurate data, the first issue is identifying areas or crops that are not delivering a margin.

Then there is the challenge of how to remove or reallocate fixed costs when scale is reduced, particularly for smaller businesses where the largest cost could be the proprietor themselves.

Soils

Regenerative farming means different things to different people, but its overall focus on soil health is clearly here to stay.

For many it is about ‘good’ farming practices that have been undertaken for many decades. For others it is an extensive change.

What it is for all, though, is the opportunity to adopt those elements that fit the soils, the scale and the ability to access machinery.

It might not mean direct drilling the whole farm and could still involve cultivations and ploughing in the right conditions.

As long as soils are well looked after and organic matter is maintained and improved where needed, the elements appropriate to the system will have been adopted.

Returns for land providers and farmers

The focus on soil health is in the interests of both land provider and farmer, whether in a landlord-tenant relationship or a joint venture.

It is preferable that a more functional relationship develops between the parties, so that the best decisions can be made about how new schemes might influence land use. 

As a yardstick, rent (or rent equivalent) and finance should represent no more than 15% of turnover.

The Loam Farm budget demonstrates how current open market rents or rental equivalents may often need to change to reflect the underlying economics of combinable cropping.

The range in rents paid does not necessarily reflect the full range in productive capacity and profit potential of land types. Poor land is almost always too expensive.

With some clarity now around future support schemes, in England at least, growers can start assessing the use of scheme options as alternative break crop choices.

Joint ventures will need to think about how to incorporate these.

In many cases it would be logical that these form part of the agreement income. Both crops and environmental options require management and inputs and affect cropping and productivity.

Whatever elements need to be reassessed, the one that sets the most profitable businesses apart is excellent attention to detail.

That knowledge (data), dedication and understanding to inform decisions simply adds to the bottom line.

A complete understanding of the economics of using land to produce combinable crops and deliver supported environmental options is essential to preserve the important relationship between land provider and farmer.

Without a material reduction in input costs for medium/low-yielding areas of land, either the land provider or the grower will stop using it for cash crops and instead use it to generate environmental payments.