A North East Perspective Who’s making money... You?

By the time you are reading this, the Farm Business Survey data for the year ending May 2022 will have been released by Scottish Government and I can only imagine that it will show farm incomes being squeezed in many sectors. This is a response to the impact of higher inflation on the main agricultural inputs of fuel, fertiliser, feed and energy.

This theme has continued throughout 2022 and now, in the second quarter of 2023, recent data published by the Andersons Centre estimates agricultural inputs’ inflation (agflation) till the end of January to be 19% annually, while agricultural outputs have increased by around 11%. As a comparison, general economic inflation (CPI) and agricultural outputs and food prices (CPI food) are currently running at 11% and 17% respectively. Farming incomes are simply not growing in line with costs.

For many enterprises, the gross margins are actually pretty healthy - even with the increases in variable costs. It is the fixed costs of many businesses that are eroding profit. The costs of maintaining and replacing machinery and the overall price of just about everything is making many businesses financially unsustainable in the medium to long-term. We have to be mindful of the changes that are ongoing in the finance sector. Banks are being put under pressure to decarbonise and de-risk their lending portfolios. What does this mean? In simple terms, businesses with a lower carbon footprint will get preferential rates of interest on borrowing. It also means that banks are viewing overdrafts and loans in a different way; restructuring debt to give businesses a smaller working overdraft and put more “hardcore” debt into long-term loans. With increasing interest rates this is making all types of finance more expensive.

It is easy to say that this is just a blip and that in another 6-12 months things will be fine, but with agricultural policy change looming in 2025, how can you begin to start making your business more resilient to whatever is coming?

I was reminded at a recent meeting that it is our variable costs that are fixed and that our fixed costs are the ones that we have control over and need to be variable. There is a need (in many cases) to not only question the enterprises on the farm, but also the ‘how’ and ‘why’ behind each system. Is the system becoming too complicated? Can it be simplified and can the costs be stripped out of it? Do I need that new bit of kit? Can I reduce the cultivations? Is my breed the right one for my farm? Is my agronomist working for me? Could I share my machinery and reduce costs?

This takes a shift in mindset to, not only start asking the questions, but to also start identifying problems and tackling them, rather than just ploughing on and hoping for the best.

One of the great things about our industry is that there is probably somebody, somewhere in Scotland, that has already made the change to their system and they are usually more than willing to share their experience. You only have to look at some of the successful monitor farm programmes over recent years and the flow of knowledge between different farmers.

In my mind, the industry is making money, but we need to be questioning why so much money is feeding other parts of the industry and is not being retained by the farmer? It is the farmer who has taken so much of the risk in buying the land and growing the crop or animal, so should you not get the most return?

Only you can change the way you do things and retain more of the income you generate. Is it time to seek out the farming peers or advisors you trust? Be open in your mindset to have those challenging conversations… and then have the tenacity to make the change.

Get david.ross@sac.co.uk