After several years of poor harvests profit returns, 2021’s healthy yields and strong crop prices provided a welcome boost for tillage incomes this year but the gains made could be wiped out by higher fertiliser and fuel costs in 2022.
To illustrate the potential impact of inflation, we analysed the accounts of a tillage farm in the southeast with circa 122ha (300 acres), of which 23ha is leased (Table 1).
This farm’s rotation policy includes spring and winter crops of wheat, barley, oats, oilseed rape, and beans.
The figures shown represent actual sales and costs for 2020. The 2021 figures are calculated on actuals for the first nine months of the year, with a three-month forecast to year-end.
Budgeted income and costs for 2022 are also shown. The calculations are based on two-year averages, with fertiliser costs estimated to increase by 100% and fuel/contractor costs estimated to increase by 7.5%.
This is not a position tillage farmers will want to find themselves in next year
When compared to 2021, the 2022 budget for this farm shows a sharp drop in profit (€488 per ha). This is not a position tillage farmers will want to find themselves in next year. So, what measures can be taken to minimise the impact of rising costs?
Prepare a budget
Every tillage farm is different, so before you start making decisions you need to work out what your budget for next year will look like.
What you don’t want to happen is that your 2021 cash surplus is wiped out by higher costs in 2022.
Once you know where you stand, you can then look for opportunities to reduce your costs and maximise your profit margin
When preparing your budget, you need to take into account that fertiliser costs are likely to double when compared to 2021.
Farmers are currently reporting quotes of €800/t. As outlined above, the cost of fuel — another significant direct expense if you use your own machinery (or a passed-on cost if you use a contractor) — is also expected to rise by 7-10% in 2022.
Building these estimated input cost increases in to your budget will give you a good idea of the likely impact on income next year. Once you know where you stand, you can then look for opportunities to reduce your costs and maximise your profit margin.
For tillage farmers, key areas to focus on when looking for opportunities to reduce costs and protect profit margins include:
Once you know what your costs are likely to be next year, you need to ensure you have enough working capital to cover them. It may be timely to review your farm’s credit limits, both with your bank and main merchants. Will you need to increase these to allow you carry the additional input costs?
If shortfalls or cashflows are tight, it may be prudent to source more working capital facilities now to have in place for the spring. Remember, if not used, no interest costs are incurred.
Looking to the medium and longer term, CAP changes, environmental issues and achieving financial sustainability are among the key challenges that all farmers need to plan for. All of these issues will involve either a potential drop in income or increased expenditure. Questions to consider include:
While some of the risks that your business faces are outside of your control — market risks, changing regulations, new consumer trends — there are steps you can take to protect your business.
So, what is your risk profile? How resilient is your business? How much financial stress can it take? How much liquidity (cash) is available?
Identifying the areas where you are vulnerable will enable you to take action to reduce your risks. Examples of practical actions might include reducing your reliance on chemical fertiliser, using GPS systems to minimise waste, and reviewing loans and interest rates to see if you can achieve better value. When input costs are rising, reducing your turnover may reduce your costs by a higher percentage and therefore could improve your profit margin. Where is the optimum profit margin on your farm?
Your accountant and agricultural adviser can provide practical advice to improve the overall performance of your tillage farm and show you how your farm is doing when compared to similar farms in your sector. Benchmarking your business in this way will often highlight opportunities to enhance your operation and improve your margins.