Lower commodity prices and rising input costs will severely restrict arable cash flows during 2015
Lower commodity prices and rising input costs will severely restrict arable cash flows during 2015 and beyond, latest predictions suggest. Preparing now could save a lot of problems later, as Farmers Guide discovers.With grain prices back to 2010 levels and input prices considerably higher, many arable farms are already feeling, or can foresee, a certain amount of cash pressure.In the short-term things look manageable, says Brown & Co agribusiness consultant Tim Young. “On a typical arable unit the level of borrowing is currently falling due to early grain sales. However, lower prices will mean many businesses will be left with a larger overdraft than normal as they go into winter, though for most it will probably be within agreed limits.”Cash looks like it is going to get a lot tighter, he warns. “A shortage looks set to bite in the first half of next year and, with poor prices also forecast for the harvest 2015 crop, this is likely to push borrowing to fresh highs towards spring 2016.”Brown & Co’s farm budgeting model shows what might happen on many farms over the 2014 and 2015 harvest years and demonstrates clearly why growers need to prepare, says Tim.Browns Farm is based on a typical eastern counties arable unit, a family farming partnership operating on 420ha (1,040 acres) of owned/tenanted light and heavy land, growing mixed combinable crops 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 in summer 2014, falling to about 150,000 in December,” he explains.”However, a recent revision shows profits are likely to fall from the 87,455 originally predicted, about 208/ha, to just 28,269, or 67/ha. As well as the lower commodity values, higher spray costs for late spring and summer 2014 and a reduced single farm payment are also having an effect.”The revised figures show that by December 2014 the bank balance remains 250,000 in the red. This is about 100,000 more than originally forecast but still within the agreed 400,000 facility.Falling marginsEarly projections for the harvest 2015 year suggest arable margins could fall a further 110,000, while labour or machinery inflation in particular could reduce income by a further 10,000, says Tim.”With no fundamental changes being made to the system, this could mean Browns Farm would require an extra 100,000 overdraft facility, the equivalent of 238/ha, by summer 2016. Now is a good time for businesses to assess their options and, fundamentally, to talk to the bank manager.”Farmers should roll budgets forward now to assess the impact of 2014 harvest prices and those predicted for 2015, he advises. “A good cash flow plan needs to stretch at least 12 months ahead and, in periods of pressure, up to 24 months. All budgets also need to be re-assessed every few months.”As well as making conversations with the bank manager much easier, reliable budgets should also be used to stimulate discussions and confirm plans to reduce foreseen cash deficits, he adds.”Reducing private drawings, reining in capital expenditure and retiming purchases and sales can all help manage the deficit temporarily.”While we would not advocate knee-jerk reactions, more permanent solutions should also be considered. Tough times can often be a catalyst for change and 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, says Tim.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,” says Tim.Main changes at a glance:– Lower commodity values (eg wheat values down from 160/t to 130/t, OSR from 330/t to 265/t).- Reduced heavy land wheat yields (down 0.5t/ha).- Higher sprays spend (increased fungicide costs in late spring and summer 2014).- SFP reduction could exceed 10 per cent due to financial discipline measures.- Higher light land wheat yields (up 1.88t/ha) and sugar beet yields (up 14.7t/ha).