Budgeting and reducing costs are key to improving net margins for arable farmers

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Work carried out by Strutt & Parker has shown that profit margins for UK arable farmers are expected to be down by more than 50% for harvest 2023.

Lower commodity prices, higher working capital requirements and a drop in Basic Payments as well as inflationary pressures on input costs is likely to cause concern. Net margin for an average arable farm is  expected to be £183/ha, down from £568/ha in 2022. For a higher-performing farm achieving higher yields and with lower fixed costs forecasts show margins to be £364/ha, but this will still be 52% lower than in 2022 and 42% lower than in 2021.

Andrew Atkinson, farm consultant with Strutt & Parker, said: “Harvest 2022 was a profitable year for arable growers who purchased the bulk of their inputs before the massive increases in input costs and benefited from the significant increases in grain prices. But the huge rise in fertiliser prices which followed, along with declining commodity prices over recent months, means harvest 2023 could end up being one of the worst financially for a number of years.

“It is also worrying to see that, while profits are forecast to rise a little in 2024, they are likely to be significantly down on where they were in 2021, which is before the extreme volatility which has characterised the past couple of years kicked in.

“Volatility is not new to farmers, but the extent of it really has been unprecedented over the past 24 months and it is this year where the pain will be felt on many arable farms. Not only did fertiliser prices skyrocket to about £1,000/t in Spring 2022, but feed wheat prices have dropped by nearly £150/t compared with Summer 22 levels and oilseed rape prices have plummeted from over £800/t in Spring 22 to around £350/t now.

“Arable farmers will be feeling like they have been on a rollercoaster and that looks set to continue. The forecast for 2024 is better than this season, but still worryingly low, which puts pressure on businesses to look for areas where they can improve financial and technical performance.”

Mr Atkinson advised that there are four key areas to look at which could help to improve net margins.

Budgeting and cash flow forecasting

Time spent on budgeting and cash flow forecasting is well worth it, as it helps to improve decision making and manage risk. While working capital requirements are estimated to fall for harvest 2024, they will still be around 25% higher than they were in 2021, at a time when farmers’ BPS receipts will be around half of what they used to be. Budgets should be reviewed frequently to reflect changing circumstances.

Set sights on getting into top 25%

The net margins of high-performing businesses are forecast to be more than 75% higher than those of average-performing farms in 2024, highlighting the value of quality farm management and attention to detail. What characterises the higher-performing businesses is a combination of lower fixed costs and higher crop yields.

Reducing fixed costs

While a higher crop yield improves financial output, it tends to be the lower level of fixed costs which makes the greatest difference in overall financial performance, so finding savings in overhead costs is likely to be critical moving forward. This is not easy; changes do not happen overnight, but even relatively small changes can help to make a difference so managers should never feel that the task is too big. The starting point is to assess your own costs and compare them with others – data is freely available from the Farm Business Survey and other industry organisations.

Agri-environment scheme income

Countryside Stewardship Scheme agreements can still be applied for with a January 2024 start date. The deadline for mid-tier applications is August 18, 2023. Further announcements on additional Sustainable Farming Incentive (SFI) options are expected in June – potentially to include extra payments for direct drilling, no use of insecticides, precision farming approaches and companion cropping. By including a mixture of options these have the potential to add around £60/ha to a business’s net margin, but this will vary between businesses depending on how suitable the new options are for each business.

Strutt & Parker’s volatility modelling tool uses a set of universal assumptions to provide an outlook for the sector. Alternatively, it can also be tailored using a farmer’s own data, including crop area, rotation, yield, input and output prices, to give a more accurate picture for an individual business.

Strutt & Parker’s Farming team will be on Stand 249 at Cereals 2023, and will be available to discuss the tool and offer advice.

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