2010 has been yet another dramatic year in the agricultural calendar.
We started with record amounts of snowfall and it looks like we'll end with the same and whilst not much harm has been done to cereal crops, many livestock farmers are facing a long, hard winter with fodder in short supply and concentrates rising dramatically. We can only hope that the future winter months are not so hard for their sakes.
Twelve months ago, wheat was trading just under 100/tonne, OSR at 230/tonne, barely enough to cover cost of production. Only those with significant economies of scale were making sufficient profit to justify the risk and employment of working capital required to grow an acre of wheat. Indeed, as soon as wheat started to rise just before harvest, many decided that 120/t generated sufficient return on capital and took the decision to sell.
With spot price nearing 190/tonne and futures for 2011 at 160/tonne, what should be your policy for selling in the forthcoming 24 months?
The severity of the spring in the Baltic states will play a significant part in the future prices, but most importantly, spend some time calculating what it will cost to produce a tonne of wheat in 2011, because without this, how can you decide whether at 160/t you are making money? And sufficient money given the risk. Importantly, we all know that the price of inputs will rise dramatically (particularly fertiliser and no doubt some excuse will be made by the fertiliser giants for rising "cost" of production…umm), so start to plan ahead for purchases now.
Can you afford to buy your fertiliser now? What about 2012 inputs? What you cannot afford to happen is that inputs rise on the back of commodity rises, yet you hang on for a spot price next year which never materialises and face a loss-making crop.
Planning for the next 24 months is so crucial and most importantly, how much credit will you require – therefore get your cash flow prepared as well, as this will help determine when to plan for crop sales and input purchases.
That leads on to the thorny issue of tax – the one thing that everyone hates to pay.
I would recommend that if possible, well before your year end, you prepare a draft set of accounts, to firstly see what the profit may well be, and allow you to review what options are available to try and mitigate tax.
I would also prepare budgets for the following year as part of that review. The coalition Government is certainly making corporate structures more attractive and the capital allowances are due to radically change in 2012. Planning purchases will be important, but make sure that the business can afford the capital expenditure.
On behalf of all at George F White, may we wish you a happy Christmas and, most importantly, a prosperous 2011.