TRADITIONAL ARABLE BUSINESS MODEL IN QUESTION? Written by Gary Markham, Land Family Business 147% of the profit of the average arable farm is BPS Farming is embarking on a period of change that most of the current generation of farmers have not experienced. Moving from the comfort of area payments to having to apply for specific funding for providing natural capital. This will inevitably put farming business in financial strain as there will be a funding gap between the two regimes over the forthcoming few years. The benchmarking of the Land Family Business (LFB) clients compared with the Groundswell Group over the past 4 years has produced some very interesting results. 1) There is a huge reliance on BPS for profitability • 147% of profit in the average LFB group for the 2020 harvest consists of BPS • In the previous 2019 harvest it was 84% • 53% of the profit in the top 25% LFB group for both harvest consists of BPS • Percentage reduction in BPS on average LFB clients is 22% in 2021 2) The amount of capital locked into the system relative to profitability is far greater than any other business • The break-even economic value of arable land based on an
Reliance on BPS BPS % of income 19 harvest BPS % of income 20 harvest 62 DIRECT DRILLER MAGAZINE
average gross margin less fuel costs is in the region of £4,000 per acre. • The additional £4,000 to £6,000 per acre up to market value has no bearing on the productive capacity. This additional capital tied up in a farming business does not contribute in any way – apart from occasionally some development sale • The capital cost of machinery over the past few years has increased to over £300 per acre Many farmers have quite correctly attempted to expand in acreage as a means of dealing with these pressures. However, expanding acres has normally meant tendering for contract farming agreements. The benchmarking results have consistently shown over several years. An average a loss of between £40 to £60 per acre is made on the additional land. Does this point to arable farming, producing commodity crops, perhaps not being a viable business model? The margin from arable farming before BPS and income from other enterprises, has been a loss of £2 per acre in the 2018 and 2019 harvests and has dropped to a loss of £104 per acre in the LFB benchmarking survey for the 2020 harvest. Change is inevitable – but managing the change is where the difficulty comes. One of the best tools to monitor the change and provide
Average 84% 147%
Top 25% 53% 53%
One acre £10,000
£6000
Capital with no economic return
£4000
Break-even economic value
achievable targets is to benchmark against farming businesses that have already made or are making these changes.
Groundswell Benchmarking Group LFB have been benchmarking a group of regenerative agriculture farming businesses for the 2017 to 2020 harvests – to identify if regenerative agricultural production systems can be financially viable. Some of the key findings for the regenerative systems are • the average output per acre is around 20% to 25% lower • variable costs are around 20% lower • gross margin 25% lower • labour and machinery costs are around 30% lower This results in a very similar average gross margin after labour and machinery for both systems of ISSUE 14 | JULY 2021
