Following an anxious wait for farmers the Euro exchange rate used for calculating the 2012 SPS payments has been set. Due to the well documented problems in the Eurozone it is of no surprise that the exchange rate has fallen. There will be further problems for farmers in managing their finances and cash flow on the back of an already difficult year, with poor weather, reduced yields and rising costs.
The rate is set at €1 = £0.79805, which is based on the last exchange rate set by the European Central Bank in September. This is a decrease of nearly 8% on the 2011 rate which was €1 = £0.86665.
For many farming businesses the SPS payment makes a difference between a profit and a loss. The effect of a falling subsidy payment on margins is something which should be considered. What will be the outcome of an 8% fall on the bottom line?
But it is not only the reduction in subsidy payments that farmers will need to consider the effects of this year. The poor weather in September caused no end of problems. Wheat yields have fallen to 2.7t/acre, the lowest in 20 years and quality of the produce is down. In some cases farmers were unable to lift their produce from the ground due to flooding and standing water. Going forward, there will be further problems. Many farmers have had trouble drilling their winter crops, which could result in lower yields if sown in the spring.
However, the price of wheat has risen 25% since last year due to the bad harvests in the USA, Ukraine and Russia which will mitigate the effects of the falling yields for some farming businesses. Other crops, such as winter barley and oilseed rape showed an increase in yields which will also help protect against the losses in other areas.
The average results hide extreme variations across the country. The following case studies show the profit and loss of three farmers with contrasting fortunes, reflecting the current price trends and situations.
Farmer A has a mixed dairy and arable farm, with 100 cattle and 300 acres of wheat, 400 acres in total.
|Milk sales (7500l per cow)||197.400||210,300|
Farmer B is an arable farmer with 400 acres, 200 acres of wheat, 100 acres of barley and 100 acres of OSR.
As the above figures show the fall in subsidy payments and poor conditions this year have not had a hugely detrimental effect on either case. The rising milk prices over the last year have helped cover the increased cost of feed for Farmer A, with an average price of 28.04ppl over the 12 months to August 2012, 1.72ppl higher than 2011.
Both Farmer A and B have seen only a small drop in income from wheat sales due to the increased price, £172/t in 2012 compared to £151/t in 2011. Farmer B also has increased turnover due to the higher yields for winter barley and OSR.
However, the above are based on the national average. There will be many businesses that sold wheat forward at a lower price or were unable to harvest some of their crop due to flooding and poor travelling conditions. Case C illustrates a farming business in this situation.
Farmer C is an arable farmer with 400 acres, 200 acres of wheat, 100 acres of barley and 100 acres of OSR, exactly the same as Farmer B. But by changing a few factors we can see the effect on the bottom line:
· Farmer C sold forward his wheat at a rate similar to last year, around £150/t
· Due to the poor weather and ground conditions he was also unable to harvest a third of his wheat.
Farmer C shows a fall in income of £40,000 due to the above factors. A fall this large, 15% on last year, will impact hugely on cash flow and result in problems in managing business finances.
Assessing the risks is a helpful tool in any business. Most of the above problems are unavoidable after all we can’t control the weather. However, if the risks are properly assessed they can be prepared for and contingency plans can be put in place. It will aid with forward planning and business structuring. Cash flows and budgets can incorporate the possible outcomes ahead. Approaching the bank ahead of time with the cash flow and budget will result in a more favourable outcome than a last minute emergency call.
To assist with cash flow problems an overdraft expansion would help in the short term. Check the details on any loans to see if it is possible to get a payment break which would give a bit of breathing space. Negotiating refinancing on any loans or hire purchase agreements will also free up some funds. Talk to your accountant about upcoming tax payments. Given the fall in income it may be possible to reduce payments on account.