Strutt & Parker has revised its harvest 2024 and 2025 profitability forecasts to show the financial impact of six months of rain, changes in commodity prices and falling Basic Payment Scheme income.
The data suggests the net margin for an average-performing combinable crops business has fallen to just £80 per hectare for 2024. This is a year-on-year reduction of 60% and follows a significant drop in 2023 due to rising input costs.
Data assumes that growers have been able to drill spring crops on unplanted winter crop areas, however, Strutt & Parker acknowledges that this has been impossible for some, while others have put more land into schemes such as the Sustainable Farming Incentive (SFI) either by choice or due to necessity.
“The impact of the weather has been felt everywhere, but some areas are clearly worse affected than others and different soil types will also have an impact, so in that sense farm profitability is somewhat of a postcode lottery,” said Jonathan Armitage, head of farming for Strutt & Parker.
“Even when applying this ‘best case’ scenario, our analysis points to worryingly low net margins for an average-performing farm for harvest 2024, considering the level of risk involved.
“Our estimated net margin for a higher-performing combinable crops business is much higher at £271/ha – based on the assumption that they will achieve higher yields and with lower fixed costs than the average business. However, this figure is still significantly lower than our 2021 baseline when the net margin was £622/ha.”
Assuming that crop rotations and yields return to more normal levels in 2025, the company predicts that net margins will increase to £214 per hectare for average farms, and £449 for higher-performing businesses.
Implications for farm businesses
Strutt & Parker states that these estimates highlight the importance of following the lead of the best-performing businesses.
“Research consistently points to the top-performing businesses being led by, and employing, people who have a mindset which is open to change, an attention to detail, a focus on marginal gains and who are constantly looking for new opportunities,” explained Jonathan.
“This message is more important than ever in this business environment. So, too, is actively managing risk which is a way for growers to put themselves in the driving seats of their businesses and protect themselves from the worst effects of extreme volatility.”
The company added that there were several strategies available to farmers to minimise the risk in their businesses:
- Agri-environment schemes: SFI can be valuable in terms of implementing a more active risk management strategy. It allows growers to take out the worst-performing areas, or lowest margin crops within a rotation, and replace them with a fixed return with almost zero risk. While the return may not be as high as that produced by a really good crop, it does avoid the risk of costly losses. Taking this approach should also mean that growers can focus their efforts on the more profitable crops in the rotation.
- Financial management: The working capital required by farming businesses has risen significantly over the past three years and the costs of machinery and equipment have also risen, so securing favourable terms for funding is a priority. Shopping around for the best deal and getting the right financial structures in place is becoming an increasingly complex process with businesses often needing specialist advice to guide them through the process.
- Business structures: Higher-performing businesses have lower overhead costs per hectare, which is largely down to lower machinery costs, although their labour, property and administration costs also tend to be lower because resources are being deployed more efficiently. If businesses are reducing their cropped area, they will need to look for ways to reduce their fixed costs with possible solutions including machinery sharing and greater use of contractors or alternative business structures such as a joint venture or a Contract Farming Agreement.
- Crop marketing: Other strategies for reducing risk might include taking a different approach to crop marketing to reflect the greater production risks growers are now facing. Spotting opportunities to sell into special markets which deliver a premium is another possibility.
- Staff management: Having a staff member unavailable for a long period because of illness or injury can also be incredibly difficult, so some farming businesses are now offering private healthcare as part of their financial package.
For more information go to www.struttandparker.com