Industry Eye: Industry should be prepared for cuts in support in the long term

A number of key drivers affect the profitability of arable farmers – yield, output price, input costs, currency values and grain supply/demand.

The liquidation of stocks left the market in short supply, hence the price surge of 2007/2008. The industry worldwide responded to the higher prices, stocks recovered and now the market is well supplied with lacklustre grain prices. Traders are not forecasting a significant change in grain values through to May 2012.

Input costs have stabilised, but fuel is still a concern. Chemical and machinery costs have increased as a result of a weak pound. Currency remains a key variable and movements in the pound, euro and dollar are responsible for approximately 60 per cent of movements in arable profits within the last decade. At the time of writing there is some sign of a strengthening pound, which could impact on output price and of course the value of Single Payments.

We are told there will be substantial cuts in public expenditure following the Budget. Agriculture may escape lightly, with the majority of aid coming via the CAP (EU funded), including Single Payments and Stewardship.

Longer term, support structures are due for review from 2013. With money tight across Europe, there are likely to be reductions and Andersons anticipate Single Payments will fall during the period 2013-2020. We anticipate a cut of approximately 50 per cent from 2012 levels by 2020.

The importance of this reduction in support should not be underestimated, as the majority of farm businesses are only profitable with SPS and ELS.

Our 'Loam' farm model charts the relative returns from arable farming. Whilst this is a hypothetical farm, it is based on our experience of costs and returns for arable businesses and takes into account factors such as price movements, changes in input costs and harvest yields.

The table above indicates the performance of Loam Farm for 2009 with our projections for 2010/11.

The impact of any cuts in SPS will erode the margins further over the next 10 years.

We believe every farming business should analyse the unit cost of production for whatever outputs are produced. On combinable crop farms this will include the cost/tonne for producing wheat, barley, oilseed rape and other crops.

In conclusion, we anticipate volatility will return to the markets for output prices and potentially costs. In response farmers must:

Understand the key drivers of profit within their business.

Manage risk. Consider forward contracts for example.

Consider fixing the SPS exchange rate in advance.

Appraise the unit cost of production for crops produced on the farm, and ask themselves how these could be reduced.

Develop a strategy which can operate at world market prices and with reducing support.

The Loam Farm Model

Loam Farm Budget /Ha 2009 Results 2010 Budget 2011 Budget

Gross Margins 418 556 561

Overhead Costs 332 338 347

Rent & Finance 142 143 142

Drawings & Tax 110 110 110

Margin from Production (167) (34) (38)

Single Payment & ELS 283 267 265

Business Margin 116 233 227

CW 19/6/10