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Autumn Rural Update Issue 1: Volatility - What is the impact on your business?

Autumn Rural Update Issue 1: Volatility - What is the impact on your business?

Thu 03 Nov 2022

Agricultural business consultancy
Rural land & property

We all know that the market has been through a period of constant and volatile changes over the last few months. Political uncertainty both in the UK and worldwide, has had a major impact on rural businesses in many different ways.

Read Issue 1 of our Autumn Rural Update on the link below to find out about recent changes in the Arable, Land and Livestock markets and how our team here at Brown&Co can help you to combat these uncertainties and of course maximise the opportunities.

Autumn Rural Update | Issue 1

View Issue 1

Arable Update by Bradley Hurn

Political uncertainty in the UK and overseas has significantly impacted markets, affecting individual sectors and businesses in different ways.

If we consider the arable sector specifically, prices have increased overall, largely as a consequence of the war in the Ukraine.

Defra is reporting that the price index for agricultural outputs increased by 24.0% in the 12 months to July 2022; in contrast, for that same period, the price index for agricultural inputs increased by 32.6%. While in many cases this isn’t necessarily impacting profitability, working capital requirements are under pressure.

For harvest 2021, the average sale price of feed wheat was £180-£190/t, depending on marketing strategy and timings.

The market range varied from £177.30/t in September 2021 to as much as £327.80/t in May 2022.

Budgets being written now for harvest 2023 are based on wheat at £260/t, which is achievable given the position of the November 2023 futures. Based on this figure, output has increased from £1,665/ha (at 9t/ha) to £2,340/ha - a real time increase of 40%.

Variable costs for wheat have increased from £550/ha to £850/ha, based on nitrogen at £2/kg rather than £0.80/kg. This is a variable cost increase of 54%, highlighting that cost inflation is outweighing output.  

Based on these figures, this increase in variable costs on 100ha of wheat increases the working capital requirement by £30,000.

With the nature of a farming calendar, the outlay is needed in advance and this is driving cashflow pressure.

For the fresh produce sector the story is much worse. Prices remain static, or with some deflation in certain markets coupled with increased input and energy costs. This is putting net margins under serious strain.

Storage costs this winter are a major concern given the price of electricity, but also against a backdrop of lower yields and an expensive growing season due to irrigation requirements; this sector is facing intense financial challenges as a consequence.

Businesses with finance obligations need to consider their debt structure and how the changes in the bank base rate will impact their business. Base rate has so far increased from 0.1% to 2.25%.

Stress testing businesses will give an insight into how performance will be impacted should interest rates rise further. As an example, borrowing £500,000 over 10 years at 4% puts the annual repayments on an amortising basis at circa £61,500. If interest rates increase to 6% this rises to £68,000 per annum and, at 8%, £74,500.

The key to managing this uncertainty is business planning and by undertaking a detailed budget to assess different scenarios, stress test the business and build in sensitivity analysis to evaluate the impact on the business.

Undertaking net margin analysis will ensure the correct combination of enterprises are taken forward to deliver the strongest possible financial outcome.

Financial planning will forecast any breaches in overdraft facility, to allow the situation to be addressed and managed before it becomes a problem.  

The short term focus of any business must be working capital requirements to ensure trade can continue; this could mean reviewing existing facilities, forecasting future requirements, and reviewing long term debt obligations.

A budget will allow informed decisions to be made and is integral to facilitating discussions with your bank and illustrating the mechanics of your business.

Land Market Update by Charlie Bryant

Anyone who takes even a cursory interest in current affairs will likely be overwhelmed by the pessimism surrounding the general outlook; it seems to pervade all aspects of the news at present.

But this position is not true for the farmland market and there is good news for anyone with any connection to, or indeed curiosity in, that sector. 

Not for the first time this niche of the property market is bucking the general trend.  

To sum it up: there is a party taking place in the farmland market and my dedicated farm agency team is keen to help you join it. 

I was fortunate enough to be very involved in farmland sales when the UK experienced the last period of extreme buoyancy in the years from 2006 to 2013. 

At that time we saw a range of new buyers enter the market; the Danes were followed by the Irish and, in turn, pensions funds and institutions followed, with purchases of significant tracts of agricultural land in competition with commercial farmers and fiscally-driven buyers. 

After 2013 the market stabilised and, indeed, has since waned somewhat. But once again we are seeing it moving forwards. 

It would be wrong to not question why this position exists, given rising interest rates, uncertainty over future farm profitability and a general nervousness about the economy, inflation and the cost of living.  

The answer is quite simple, but multi-factorial. 

Make no mistake, there is a significant amount of cash generated from development land sales and compulsory purchase acquisitions that must be invested for advantage to be taken of the ongoing fiscal benefits of land ownership, such as capital gains rollover relief and agricultural property relief for inheritance tax purposes. 

Add to this the relative safety which is attached to this type of property class and it is no surprise that there is such competition for farmland. 

To continue the party theme alluded to earlier, there are gate-crashers coming, comfortably nestling alongside those buyers already listed. 

Much has been documented in recent months regarding the environmentally strategic benefits of owning land and what can be done after control over it has been secured. 

This is a contributory factor in the surge in interest, not only in arable land but in all land regardless of size, type or geographic location. 

All this plus the continued prevalence of existing farming businesses, some of whom are inquisitive for further land acquisitions. 

There are of course two main factors which determine any market - supply and demand. If the current demand wasn’t enough to fuel the market it is being further enhanced by the relative scarcity of supply. The net result is market buoyancy. 

Here is where Brown&Co can step in.

From a buyer’s perspective, our strategically located provincial offices coupled with ongoing day-to-day business relationships on all matters with farm owners and occupiers, means we are constantly on the ground and in the farming communities and therefore aware of all opportunities as and when they arise. 

Our network of land agents and farm business consultants in all our regions of operation enable us to maintain an unrivalled knowledge of opportunities, valuation advice and market trends at a microlevel.  This service  does not stop at the acquisition but can be extended to ongoing farming support post-purchase, especially for those not looking to undertake the farming in hand. 

From a seller’s viewpoint, you only get one chance and our agents are well versed in providing bespoke marketing advice to achieve the best results. A combination of our experience with appropriate valuation advice, formulating a professional marketing campaign and detailed knowledge of applicants, both local and remote to the property, will ensure a successful outcome. 

An increasing measure of the market, especially for but not confined to whole farm offerings, is the private transactional activity which takes place.  This necessitates an agent, whether acting for a buyer or a seller, to have the most comprehensive knowledge of the marketplace. With such scarcity existing, this needs to be over an extensive area. To meet this requirement we have developed a strong team of buying agents tasked with finding off-market opportunities for our database of registered applicants. 

Whether you are a buyer or a seller, you would be well advised to contact one of my dedicated farm agency team for an initial discussion.

Livestock Update by Non Thorne

Farmers and food producers are fundamental to domestic food supply and to the food exports that contribute to our global economy but, as we have become all too aware of following recent events, farming can be an unpredictable business too.

The agricultural industry is volatile. Issues with drought, disease, conflicts within countries, market price and availability of raw inputs can create myriad challenges for business performance and cashflow.

And more so than ever in recent months. According to government reports, food produced by UK farmers has cost consumers 10% more on average in the last 12 months because of the escalating cost of inputs. This increase is more significant than usual and is a contributing factor to the ongoing cost-of-living crisis in the UK and further afield.

Nearly every cost will have increased in recent years but it’s farm input costs which have increased disproportionately.

Therefore, while everyone is experiencing pressure on their budgets, it is farmers who are bearing the brunt of soaring costs.

The biggest increases have been in forage, feed and fuel; the ongoing conflict in Ukraine has caused discrepancies in the supply chain and is responsible for some colossal price increases.

The cost of animal feed has soared across all livestock sectors. Ukraine had been one of Europe’s biggest suppliers of corn and grain for use in feed for chickens, pigs, sheep and cows - UK farmers had imported over £20m of animal feed from Ukraine in 2021.

Alarmingly, there is no indication of that these prices will fall any time soon, therefore farmers must either find alternatives or prepare their businesses for long term increases.

Labour is also a challenge for many farms as a result of the combination of stricter immigration laws post-Brexit and the fallout from the Covid-19 pandemic.

There is a glimmer of hope though as it is understood that reform of the immigration system is being considered to allow farm businesses to recruit more staff from overseas.

While the collapse of sterling will make it less attractive for foreign workers to seek jobs in the UK, this reform should help alleviate some of the acute labour shortages currently being experienced.

But, despite all these pressures, there is good reason for farmers to be optimistic for the long term prospects of the industry as they ride out the current storm with their contribution to UK food security valued more than ever amid this period of global instability.

And, while there will always be issues that are beyond the control of farmers, there are positive steps they can take to manage risk.

Budgeting is key to this, as a means of protecting the farm business from volatility

This creates a resilient business as management strategies and protocols are adjusted to manage, and more importantly, overcome those bumps in the road.

Budgeting also allows for benchmarking opportunities, enabling financial and physical comparisons with business of similar type and scale.

So, while there are some factors that are at the mercy of global events and government decision making, it is more important now than ever to look ahead, to assess your cashflow and to make a plan.

To view this edition in an interactive format please visit the link below. Don't forget to come back next Thursday for Issue 2 in our Autumn Rural Update series.

Issue 1

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