In the midst of the Brexit uncertainty, a new farming cycle has begun and the challenge faced by farmers to make a profit on these crops may be the one of the most difficult we have seen in recent years.
Farmers will always be price takers for their crops; beating the market involves a gamble that many are either not prepared or not able to take. The reality is therefore, that the profitability of farming pivots around management of cost.
To that end, the fall in the value of the pound since the Brexit decision is looking likely to start to have an impact on costs in 2017, so for arable famers to capitalise on the potentially higher world grain prices and increased BPS rate, there needs to be a firm control of the costs and a proper consideration of how much of an increase is needed in yield to break even from any additional spending.
We would encourage our clients to have at the very least a crude working of how much is being spent per acre as you go along. There are so many products now to control pests and diseases, but the effect on profit may only be marginal. Given the uncontrollable factors involved, the reality is that it may not actually be worth as much as you think to attempt to improve the yield in a patch of blackgrass.
We also advise our clients to look at their machinery spending and decisions carefully over the coming year. In Savills’s 2015 harvest research, the calculated cost of machinery was £34 per acre together with depreciation of £39 per acre. There have been incentives to purchase new machinery over recent years, bringing the benefit of generally reduced repair costs, but with it significantly higher depreciation charges than for second hand machinery. Depreciation may be written off as an accountant’s paper exercise, but the cost of the machinery must be considered against the profits.
Farm machinery technology has progressed alongside that of cars, with even the potential introduction of electric tractors by the end of the decade, but with this price has also increased, although the basic stats of the tractor are not significantly different from its predecessors. A 200 horsepower tractor in 1982 cost £30,000, today the equivalent would be likely to cost in the region of £90,000. In cost comparisons, while repair costs of second hand machinery may be almost double that of new machinery, the depreciation cost per year of new machinery is potentially 60% higher than that of second hand equipment. In numerical terms, new equipment with a cost of £1.5m may be compared to a second hand cost of £600,000. In an AHDB trial the new equipment cost £54 per acre to run in the accounts (repairs and depreciation) compared with £28 per acre for the second hand machinery.
As with every decision there are many other non-financial factors to consider such as down time while repairs are required and managing machine hours across the fleet of equipment to reduce the need for repair, not to speak of being able to purchase the machinery you want second hand. The reduction in the value of sterling has been a massive stimulus to the used machinery export market and is pushing up the prices in the UK and making it very hard to find the machinery you require.
Putting machinery cost into context, with a good price it may take 500 tonnes of wheat to buy a new tractor, making machinery decisions vital to the finances of a farming business, especially with a potential increase in the alternative.