As we discussed in our latest edition of AgriView, a large number of farming businesses are finding trading conditions challenging even with the benefit of Basic Payment Scheme receipts.  Everyone probably has a view on the effect on UK Farming of our exit from Europe but very few have decided what to do to prepare for it.

In its most simplistic form, we know that subsidies in their current form will go and be replaced (at a reduced level) by payment linked to environmental management including soil health and fertility, water management and conservation.

We can be certain that crop and livestock prices will be more volatile as global markets and currency fluctuations have a greater influence on us.

We can expect labour to be less available for farm businesses both in terms of directly employed labour and family labour as fewer of the young generation see a future in their family farms.

Future profitability will be a function of technical and true business performance rather than subsidy receipts.

A brief study of the most recent DEFRA Farm Business Survey data shows some interesting statistics.  Taking large mixed farms as an example:

One point to note is that for average mixed farms, subsidies contributed 87% of net profit, whereas for farms in the top 25% the contribution was 52%. While any reduction in subsidies will significantly affect the profits of all farm businesses, it is clear that farms in the top 25% have a lower reliance on subsidies.

The other striking point is that net profit for the top 25% is nearly double that for average producers and that this is down to a combination of lower variable and fixed costs.

Very large changes to profit levels can be achieved by improving each element of the cost structure of the business rather than wholesale system changes.  The main areas of difference are as is nearly always the case, machinery costs, labour and borrowing costs.

The first thing businesses should do is benchmark their performance and make sure they are operating at the highest level.  We are helping a number of businesses to analyse and improve their performance. 

Some headline Benchmarking KPI’s for a large combinable crop farm would be as follows:

Technical performance varies hugely across businesses with the gross margins of top performing businesses sometimes twice those of poorer performing businesses – the extremes are most obvious in the dairy sector and combinable crops – with or without blackgrass.

Good technical advisors are available to improve performance but also to inform producers as to their relative performance. Farm businesses should review their technical advisors and contractors to make sure they secure the best, whilst they still have capacity.

As mentioned earlier, labour will become a scarce resource and good labour is very scarce, so farm businesses must find and retain the best available.

Good Farm Managers will have the greatest influence on performance and all businesses (especially the owner managed) should review their performance.

The industry is often criticised for its lack of emphasis on training, with time and cost cited by farmers as the greatest barriers to undertaking any training. However, development of technical and business skills has a huge value, be it obtaining formal qualifications, or informal local discussions to share business ideas.

Succession is a real issue in farm businesses today.  The changes and investment required to remain profitable will require energy and a long-term business horizon to deliver.  Family businesses particularly should plan for and encourage early succession, and then take the opportunity to review and formalise the business structure.

Gearing used to be a much larger issue for farm businesses.  With currently low interest rates, relatively small increases can have a substantial effect on margins.  All those with bank borrowing should take steps to ensure that it is secure and perhaps fix the interest rate for an element of this borrowing.

Sustainable systems will be key to future business viability and indeed are very likely to be encouraged in future subsidy arrangements.  Many arable farms appear to have met a yield barrier whilst input costs continue to rise.  Dairy enterprises have had to deal with this already where too fixed a focus on yield has resulted in falling margins.  As Dairy producers have begun to refocus on lower input, ‘milk from grass’ systems so arable producers will have to improve soil structures and fertility, adopt different rotations and consider alternative cultivation techniques to reduce their relliance on purchased sprays and fertilisers.

As part of the need to improve soil fertility many arable units will wish to incorporate livestock enterprises into their systems.  We see real opportunities in the future for grazing based livestock producers to expand their businesses and generate improved margins to their own businesses and others.

Many farm businesses supplement their agricultural income with diversified enterprises, which can provide a more stable income to complement the seasonality of some farming systems. Businesses should consider carefully all their attributes, including physical assets, skills of personnel, and access to local markets to look for opportunities for alternative income streams. At present there are a range of capital grants available providing funding for up to 40% of eligible costs towards rural diversification projects.

We feel that Brexit will bring about very substantial changes to UK Agriculture.  The period leading up to these changes must be used to measure performance, improve it and secure better technical advice, management and labour where necessary.  We are very fortunate in being involved with a number of farming businesses which operate in the top 10% of producers on the basis of accurate benchmarking.

We are able to help farm businesses benchmark their performance and then provide further analysis to identify potential areas to improve profitability.

For further information, contact Tom Paybody on 01858 411225 or email here