Farmers predicted to produce food at a loss

More is being done for the environment but farm incomes continue to decline and the average farmer is losing money producing food which means diversification and European aid are vital to underpin farm profits and maintain investment in the countryside, says Deloitte as it publishes its latest Farm Income Survey.

The results, produced from Deloitte clients’ accounts with year ends up to June 2005 reflect the fortunes of farm businesses across lowland England. The average profit generated from all activities by farmers in the 2004/05 year was £66/ac. This is a 19% decline on the previous year’s £81/ac. Looking forward, the firm predicts that net farm income from all activities will decline further to £62/ac in 2005/06.

The headline results mask different income streams which now make up farm incomes. In 2004/05, the business of producing food included area aid payments linked to a number of specific commodities. Thus the business of food production resulted in a profit of £38/ac. The second element of profit has increasingly come from diversification, ranging from contracting and renting property to completely new businesses. In 2004/05 this again increased and contributed £28/ac.

However, looking forward to the current 2005/06 year, this will be the first time that the Single Farm Payment – introduced as part of the Common Agricultural Policy Review – comes into effect. This will give farmers three income streams contributing to the predicted overall profit of £62/acre. Considered in this way, the business of producing food operates at a loss of £35/ac; profit from diversification rises further to £31/ac; while the EU Single Payment of £66/ac (net of estimated “cross compliance” – land management obligations) contributes to the overall profit.

“It is clear that EU support is still vital contributor to our clients overall net farm income,” said Deloitte Partner Mark Hill.

However, the Single Farm Payment may halve over the next eight years to 2012 and there is debate about additional reductions Therefore, Deloitte predict that the average farm will face significant food production losses unless there is a marked rise in commodity prices.

“There is little sign of commodity prices improving in the short term, yet farm costs, particularly fuel and fertiliser costs, continue to rise,” said Mr Hill. “This will create a squeeze on farm finances that threatens investment in the countryside. Our prediction over the next three years is that farming incomes for all activities will fall to just £48/acre, but most importantly the mix of income streams will change dramatically with little incentive for food production.

Applying these results to an average Deloitte client farming 1,000 acres, the likely results over the next three years would be as follows:

£/1000 acres 2004/05

Actual 2005/06

Forecast 2007/08 Prediction

Loss from food production

EU support based on food production (£23,000)

£61,000 (£35,000)

Nil (£41,000)

Nil

Income from ancillary enterprises £28,000 £31,000 £39,000

EU support for based on land management (est). Nil £66,000 £50,000

TOTAL £66,000 £62,000 £48,000

“The rational response to this is land being retired from food production unless prices improve in the future,” said Mr Hill.

The likely result of operating at marginal returns is a polarisation of operations, with the broad acres of Britain farmed and maintained in their current state on an increasingly large scale necessary to further drive cost out while some businesses gain the added value of niche markets on relatively small areas.

“Environmental benefits are increasingly being delivered by farmers, however this will only be sustainable if farm businesses return to generating profits from their core enterprise – food production – rather than recycling EU support,” said Mr Hill.

The sector results

Combinable crops

For the 2003/04 year, a sharp 15 per cent decline in wheat price from £82/tonne to £69/tonne was offset, in part, by an increase of 9 per cent in yield. This resulted in combinable crop farms (those with more than 80 per cent of land in combinable crop production) seeing net farm income for all activities decline from £76/acre to £48/acre.

Looking forward, we predict this sector seeing a further decrease to £40/acre.

“Understanding cost of producing a tonne of a crop becomes ever more important,” says Deloitte Partner Richard Crane. “This is especially important with low prices and no directly attributable EU support – an issue that must be borne in mind when/if the opportunity comes for growing crops for biofuel”

Roots

This sector, which includes potatoes and sugar beet, is notoriously subject to sharp fluctuations. In 2004/05, net farm income plummeted to £65/ac; down from £127/ac in the previous year.

The drop largely results from a sharp down turn of 25 per cent in the price achieved for potatoes.

Sugar beet returned a good profit with an average selling price of £28/tonne despite significant C quota beet diluting the £32/t average A&B quota price amongst the Deloitte client base.

Looking forward to 2005/06 Deloitte predict that returns will be similar although the prospect of the sugar beet price being significantly reduced through EU policy changes is cause for real concern for farmers in the sector and will have a significant effect on their business.

Dairy

The fall in milk price has had a dramatic effect on dairy profitability. Milk prices received by the farmer vary considerably depending on buyer and location.

This year Deloitte is not reporting any average income figures for its dairy clients as the variability of prices and systems do not make meaningful comparisons possible.

“What is clear is that the single most important factor, regardless of system, is the milk price achieved,” said Mr Hill.

Cost of production also vary depending on systems and scale, but the range in the Deloitte sample varied between 15p and 20p a litre before rent, finance and quota costs.

Overheads

The 2004/05 year saw some significant increases in the prices of energy with fuel up 13 per cent. However, some more recent rises in energy costs will not appear until the 2005/06 accounts.

Machinery costs reduced in 2004/05 reflecting an easier autumn where seedbeds were easily established and low wear.

Interestingly rents increased reflecting an increase in area taken on under farm business tenancies, rather than rents per acre which if anything fell – especially in the roots sector. Property costs were remarkably stable reflecting continued investment in the farmer’s most valuable asset.

Other overheads increased as farmers spent more on advice dealing with the implementation of European reform.