Arable farms face a cash erosion over the next 18 months and careful planning will be needed to minimise the impact
Arable farms face a cash erosion over the next 18 months and careful planning will be needed to minimise the impact. Better wheat yields this harvest will only provide short-term relief, especially on farms with rent to pay, warns an agricultural business consultant.
Brown & Co’s farm budgeting model reveals the typical situation many progressive growers will face through to the end of 2017. ‘Brown’s Farm’ is based on a typical eastern counties arable unit with 420ha (1,040 acres) of land in total, 20ha of which is pasture, 10ha is down to environmental stewardship and 4ha of game cover. Rented land accounts for 160ha (400 acres) of the total, growing mixed combinable crops and sugar beet.
“Most crops were about on budget this harvest, but wheat crops yielded 10-15 per cent more on average, producing an extra 25,000 in cash over the most recent budget,” says Brown & Co’s agricultural business consultant Tim Young. “Currently the position doesn’t look too bad; there is still 100,000 of headroom on the overdraft and all grain sales are still to be made.
“Despite that, the cash position will continue to tighten. The current overdraft stands at around 300,000, and the current 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.”
Growers need to scrutinise 2016/17 budgets to identify how big a problem their own business might be facing, Mr Young advises.
“Net farm income for 2016/17, including BPS receipts, is in the red, but only by 15,407. 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 – the overall effect at Brown’s Farm shows cash declining by almost 80,000, rather than 15,000.”
The business should lock down on spending where possible, with the above private drawings being the first target, he advises. “Pensions contributions should be reviewed in the short term, and a review of overall drawings will now be appropriate.”
Rent and finance costs of just under 140,000, serviceable before the recent commodity price crash, now stand out as a key problem, says Mr Young.
“At 200/acre for the rented land, Browns Farm’s rental equivalent is almost 203/ha, or 79,000. Finance costs, including bank charges and various loan interests, amount to almost 61,000. These overheads are now really hurting.”
Plenty of owner-occupiers who have borrowed to buy land will be facing similar costs, he adds. “Farmers who are paying 200+/acre for arable land or the equivalent without fully assessing the impact on the existing business are going to really struggle in the short term.”
The obvious solution at Browns farm is to negotiate a higher overdraft, but the bank manager may be reluctant to do this on the back of recent increases in working capital requirement. A better solution might be to secure the core 300,000 overdraft on a long-term loan, says Mr Young.
“This could be fixed at around 4 per cent 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, and reduces risk to the business, improving the business’ liquidity ratio (current assets v current liabilities).”
A rent review is scheduled in September 2016, but the current 200/acre rent is likely to reflect the market rate. Serving notice to quit is not a good option as the business is geared to farm almost 400ha (980 acres), Mr Young advises.
“A further consideration affecting cashflow is the anticipated receipt of the Basic Payment monies. Although we are buoyed by repeated press announcements of a December roll out and recent confirmation of some entitlements transfers, Brown’s Farm remains cautious with BPS receipts budgeted for May – hopefully a worst case scenario.”
“It might be better to ask if the business could farm 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, says Mr Young, 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.
“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,” says Mr Young. “A full analysis of the 2016/17 budget is 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, but it is vital to be proactive rather than reactive when it comes to managing cashflow.”