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Brown’s Farm 2015

The cash position of many arable farms will be eroded significantly over the next 18 months and farmers will need to plan carefully to minimise the impact.

Better wheat yields this harvest were welcome, but will provide only limited relief for many farms’ borrowing requirements. The cash position is set to tighten considerably, especially on farms with rent to pay.

Our farm budgeting model, Brown’s Farm, demonstrates the position many progressive growers will face through to the end of 2017.  Brown’s Farm is based on a typical Eastern Counties unit growing a mix of combinable crops and sugar beet on 386ha of cultivated arable land, 160ha of which is rented.

Most of the farm’s crops were near to budget this harvest, but wheat crops yielded 10-15% more, producing an additional £25,000. That has helped the nearby position – there is still £100,000 of headroom on the overdraft (see chart) and no grain has yet been sold.

Despite that, the cash position will continue to tighten, as the additional wheat tonnage is insufficient to cover the poor market price. The current overdraft limit of £400,000 could be breached by spring 2016, before declining by a further £100,000 towards the end of the 2016/17 financial year.

At first sight the situation doesn’t look too bad. Net farm income for 2016/17, including BPS receipts, is in the red, but only by about £25,000. However, this ignores the fact that well over £52,000 has been allocated for private purposes, including personal drawings, school fees, pension contributions and tax, and a further £26,000 in other bank drawings arising from changes in capital items, mainly due to machinery purchases and financing.

These figures will be typical for many arable businesses, though growers will need to scrutinise their own 2016/17 budgets to obtain an accurate picture. The overall effect at Brown’s Farm shows cash declining by almost £80,000, rather than £15,000.

So what can be done about this?

Many farm businesses face a similar outlook. There is a wide range of potential solutions worth examining, with varying degrees of relevance to individual enterprises.

In almost all cases the first advice will be to lock down on spending where possible. At Brown’s Farm, the private drawings outlined above would be the first target. Pensions contributions should be reviewed in the short term, and a review of overall drawings will now be appropriate.

The next area to address is rent and finance costs. At just under £140,000 these were serviceable before the recent commodity price crash, but now stand out as a problem area.

Brown’s Farm is paying £200/acre for the rented land, or almost £500/ha. That produces an overall rental equivalent of over £200/ha, or £79,000. Finance costs, including bank charges and various loan interests, amount to almost £61,000.

This is by no means unusual. Farmers who are paying £200+/acre for arable land without fully assessing the impact on the existing business will struggle in the short term.

The obvious solution at Brown’s Farm is to negotiate a higher overdraft, but the bank manager may be reluctant to do this due to recent increases in working capital requirement. It might be better to secure the core £300,000 overdraft on a long-term loan.

This could be fixed at around 4% over 25 years depending upon existing gearing. That might be a slightly higher rate than the overdraft, but it would reduce projected peak borrowing from almost £490,000 at the 2016/17 year end to £190,000. This also reduces the apparent risk to the business, improving the liquidity ratio (current assets v current liabilities).

A rent review is scheduled in September 2016, but there is unlikely to be much relief here, with the current £200/acre charge likely to reflect the market rate. Serving notice to quit is not a good option as the business is geared to farm almost 400ha.

It might be better to consider farming more land through a contracting enterprise. There might be an opportunity in some parts of the business where there is headroom in labour and machinery, for example combining.

The other alternative is to put the whole farm in a contract farming agreement, allowing the business to liquidate some assets while maintaining its trading status.

This would, however, be a wholescale change and must therefore be considered not as a knee-jerk reaction but as a more structural change, planned to include succession and longer-term aims of the family.

There are several more short-term options that may help ease cash flow problems, some more obvious than others.

One area that can be overlooked is the phasing of input purchasing, particularly fertiliser. Paying now for product that will be used next autumn could work out considerably cheaper than buying spot, and could be funded by phasing payments with crop sales or other sources of income. Alternatively, an advance against future grain sales could be sought.

It might also be worth looking at credit arrangements with a fertiliser supplier – these may be worthwhile, particularly if fertiliser values look like falling further.

Another option is a flexible loan such as that offered by AMC. This five-year product offers pre-agreed funding that farmers can access at any time when required.

These options illustrate just some choices that are available beyond extending the overdraft. We would never advocate a business trying to borrow its way out of trouble, but provided the underlying business is profitable and able to service its debts it is a perfectly acceptable short-term solution to aid cash flow.

Despite the poor press, the new Countryside Stewardship scheme (CSS) could provide a useful source of funds. Brown & Co has had real success in getting clients into the scheme – while Brown’s Farm is currently in an ELS so it is not an immediate option, any business that is eligible should consider it. Even after commodity prices recover, CSS is likely to deliver better returns than cropping on areas such as field margins and corners.

A lot of farms have money tied up in assets, and it is worth exploring avenues to release at least some of it. Most farm businesses have surplus machinery and now is as good a time as any to consider selling it. Recent Brown & Co auctions have seen good quality machinery fetching very good prices as bidders seek alternatives to expensive new kit.

Currently, Brown’s Farm has £350,000 tied up in machinery, which is not unusual in a farm of this size. Releasing at least some of this by selling and leasing instead will alleviate the cash shortage or reduce loan payments, though of course the farm will no longer own the asset.

Brown & Co’s Labour and Machinery Costings service can pinpoint the cost of owning and running all machinery, as well as the cost of labour, including an assessment of non-productive hours, which often are ignored.

Farm businesses can assess and compare the true cost of their operations and crop production, something that most would have previously found very difficult to do to this degree of accuracy.

In Brown’s Farm’s case, the most obvious target identified by this tool is the farm’s relatively new 230hp tractor. This has an annual standing cost of £30,197 – the amount it costs to own it, ready for use, net of running costs.

However, the tractor only worked during 22 weeks of the year, which, assuming a rental cost of £850/week, amounts to an annual rent of just £18,700. The farm is paying almost £11,500 for the luxury of having it standing in the shed for 30 weeks just in case it might be useful for the occasional odd job.

In summary, the overall position of the business is not in danger, but it is uncomfortable to be going backwards by £100,000 per year. A full analysis of the 2016/17 budget is therefore needed to reveal the real picture and the steps required to help businesses weather the current commodity price downturn.

There are options available to farmers in this position; it is vital to be proactive rather than reactive when it comes to managing cash flow.

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Brown’s Farm

420ha farm in eastern counties

Cropping (2016/17) – winter wheat (156ha), OSR (77ha), winter barley (39ha), sugar beet (39ha), spring beans (38ha), dried peas (37ha).

Heavy land rotation – WW, OSR, WW, SBNS

Light land rotation – WW, SBT, WB, OSR, WW, PEAS

Farming family partnership

Owner (260ha) and tenant (160ha)

All machinery operations apart from sugar beet harvesting are conducted in hand.

Crop yield and price forecasts 2016/17

Crop Yield (t/ha) Price (£/t)
Winter wheat 9.25 128.5
Winter barley 7.2 115
Winter OSR 3.5 260
Spring beans 3.8 150
Dried peas 3.8 220
Sugar beet 70 21

 

…………………………………………………………………………………………………………………………………………………………………..

 

Net farm income (2016 harvest)        
Budget        
Crops   Ha £/Ha

Total

Winter Wheat (light land)   78.00 506.79

39,530

Winter Wheat (heavy land)   78.00 811.77

63,318

Winter Barley   39.00 406.92

15,870

Winter OSR   77.00 520.00

40,040

Spring Beans   38.00 315.00

11,970

Dried Peas   37.00 573.41

21,179

Sugar Beet   39.00 625.62

24,399

    ………………………… ………………. ………………….
Arable Margins   386.00 560.38

216,306

         
Rent Received     9,200  
Entry/Higher Level Stewardship     12,600  
Basic Payment     72,761  
Miscellaneous income     7,787  
       

102,348

         
Total farm gross margin      

318,654

         
Less fixed costs:   £/ha    
Property costs   26.92 10,500  
Labour   84.63 33,006  
Machinery   304.77 127,819  
General Overheads   81.7 31,864  
    …………………………… …………………  
Sub Total   498.02  

203,189

         
Pre Rent & Finance Surplus      

115,465

         
Rent   202.75 79,072  
Finance   155.79 61,282  
    ………………………….. …………………  
Sub Total   358.54  

140,354

         
Total Net Farm Income      

-24,889