The sharp downturn in commodity prices will seriously reduce cash flow on arable farms in 2015 and beyond. Prepare now to avoid getting caught out.
It hardly needs saying that many arable businesses will have to make more use of their overdraft facility in the coming months. With grain prices now on a par with 2010 levels, and input prices considerably higher, there is already a certain amount of cash pressure being felt or foreseen.
In the short-term at least, things look manageable. On a typical arable unit the level of borrowing may reduce through this autumn as early grain sales are banked. However, lower prices will leave larger overdrafts than normal for this time of year, but for most it will probably be within agreed limits.
Looking further ahead, that may not be the case. A cash shortage looks set to bite in the first half of next year and, with poor prices also forecast for the harvest 2015 crop, the combined effect looks set to push borrowing to fresh highs towards spring 2016.
Brown & Co’s farm budgeting model reflects what might happen on many farms over the 2014 and 2015 harvest years, illustrating clearly why growers need to revisit their budgets and prepare for what lies ahead.
Browns Farm is based on a typical Eastern Counties arable unit, growing 420ha of mixed combinable cropping and sugar beet. The original budget for the current harvest year (April 2014-2015), drawn up in December 2013, forecast a peak borrowing requirement of about £370,000 last summer, falling to about £150,000 in December (see graph below).
A recent post-harvest revision predicted a sharp fall in profits (see table below). Key changes include lower-than-predicted commodity values, higher spray costs for late spring and summer 2014 and a reduced Single Payment, resulting in a revised budgeted profit of £28,269 (£67.31/ha) compared with the £87,455 (£208.23/ha) originally predicted.
The overall effect shows that by December 2014 the bank balance remains £250,000 in the red. That’s about £100,000 more than originally forecast, but still within the agreed £400,000 facility for Brown’s Farm.
Early projections for the harvest 2015 year suggest arable margins could fall a further £110,000, while rising labour and machinery costs in particular could erode a further £10,000.
With no fundamental changes being made to the system, this could mean Brown’s Farm would require an extra £100,000 overdraft facility, the equivalent of £238/ha, by summer 2016. This might not be a problem with enough warning, but it could cause disruption if needed quickly. Now is a good time for businesses to assess their options and, fundamentally, to talk to the bank manager.
While not quite a worst-case scenario, the 2015 budget shows a loss in the 2015 harvest year and a resultant cash deficit, and leaves 2016 starting off on the back foot. There is little doubt that for all but the most efficient farms current commodity prices are below cost of production and action needs to be taken by every farming business to address the resulting issues.
We would thoroughly recommend farmers roll budgets forward now to assess the impact of 2014 harvest prices and those predicted for 2015. It is no longer enough to budget only a year ahead, let alone three months. A good cash flow plan needs to stretch at least 12 months ahead and, in periods of pressure, up to 24 months.
These budgets should also be assessed regularly, analysing actual performance against budget every few months. Doing nothing could lead to very uncomfortable conversations with bank managers and suppliers in 2015.
As well as providing a much better understanding of a business’s borrowing needs, reliable budgets should also be used to stimulate discussions and confirm plans to reduce foreseen cash deficits. Short-term remedies such as reduced private drawings, keeping a tight rein in capital expenditure and retiming purchases and sales can all help manage the deficit temporarily.
Whilst we would not advocate knee-jerk reactions, these discussions should also include more permanent solutions to mitigate cash problems. Tough times can often be a catalyst for change, and therefore can create opportunities, as people are more willing to take a hard look at their businesses.
Brown & Co has extensive benchmark data for low-cost cereal producers to pinpoint key areas that individual business should consider addressing. Re-assessing cropping plans, might be a good start. Labour and machinery costings are important areas that can highlight significant savings if managed correctly, perhaps using machinery sharing and joint ventures.
Moving to a contract-farming agreement might make sense. Letting or even selling some land, particularly off-lying blocks that are more expensive to run, might be worth considering if this produces a more streamlined and profitable operation. We know tough times can be managed. But taking action now is key. A reactive approach costs money, which could be in short supply over the next year or two.
Brown’s Farm – In summary
- 420ha all-arable farm in eastern counties
- Cropping – winter wheat (152ha), OSR (78ha), winter barley (39ha), sugar beet (39ha), spring beans (39ha), dried peas (39ha).
- Heavy land rotation – WW, OSR, WW, SBNS
- Light land rotation – WW, BEET, WB, OSR, WW, PEAS
- Farming family partnership
- Owner (260ha) and tenant (160ha)
- All machinery operations apart from sugar beet harvesting are conducted in hand.
Main changes include:
- Lower commodity values (eg wheat values down from £160 to £130/t, OSR from £330 to £265/t).
- Reduced heavy land wheat yields (down 0.5t/ha).
- Higher spray spend (increased fungicide costs in late spring and summer 2014).
- SFP reduction could exceed 10% due to financial discipline measures.
- Higher light land wheat yields (up 1.88t/ha) and sugar beet yields (up 14.7t/ha).
What’s changed since 2010?
Over the past six months feed wheat prices have fallen almost £60/t, back to 2010 levels. At that time, nitrogen was about £170/t and diesel was £0.48p/litre. This suggests inflation of 48% and 29% respectively.
Machinery costs have also risen dramatically. For example, tractors now cost 24% more than they did in 2010.
With input prices expected to continue tracking higher, and volatility in commodity prices now the norm, these figures clearly demonstrate the need to get business fit for the long term. That includes being able to make a profit without SFP/BPS payments, which won’t be around forever.