Keeping an eye on costs

From fuel and fertiliser to machinery spares and labour, virtually every farm cost has risen for 2022/23, as economic and political turmoil meets other supply and demand pressures.

Andersons’s Agricultural Prices Index, shows ‘agflation’ averaged 25% for much of 2022 (see chart below), although certain costs, notably fuel and fertiliser, saw significantly bigger increases. Ammonium nitrate prices, for example, trebled, on top of doubling the previous year, prompting some to find cheaper alternatives for this spring, such as urea, or reduce planned applications.

However, as Graham Redman of The Andersons Centre, and editor of the John Nix Pocketbook says, although costs are higher, many businesses have been able to lock into stronger harvest 2023 prices, which means profits won’t necessarily be down (see table on next page). Growers should therefore think carefully before cutting back, particularly if it will compromise yield.

“Inflation does though mean the risks are greater, especially where farmers are incurring costs before selling any crop. There is so much happening globally, nobody knows what commodity prices will do, whereas costs are largely set in stone early in the season.”

Budgeting

Accurate budgeting and knowing your cost of production, is therefore crucial, Mr Redman says.

“People often think that when prices are changing so much, it’s not worth budgeting because it’s going to be wrong. But, it creates a model of the farm business that lets you play around with the numbers to see where profit is coming from, and importantly, which crops are not making money.”

Understanding the true cost of production also allows growers to lock into forward prices that they know will be profitable, he adds.

Return on investment

High inflation reinforces the need to calculate the likely return on investment from any input, particularly fertiliser and agrochemicals, Mr Redman continues.

“For the first time in 30 years, working capital is a big issue. Before spending money on anything, it’s good business sense to stop and think where you will get the money back; how long’s it going to take; and whether it’s a risk-based decision, or to generate more yield?”

Regarding agrochemicals, which have not increased in price as much as other inputs, he recommends growers carefully consider whether the likely yield response will cover the additional cost. Certain inputs may be questioned when there is minimal return on investment, but if the product’s likely to deliver a big return, or reduce the risk of crop failure, “it’s still a no-brainer”, he says.

Digital farming platforms, such as FieldView, can play a valuable role in collecting and analysing the data needed to refine management decisions, as Nottinghamshire farm manager Richard Cross found last season. Analysis of variable rate nitrogen trials held on the farm showed potential to reduce the nitrogen rate in oilseed rape by 40 kg N/ ha last spring, without compromising yield. He is using FieldView to build a library of field performance across the rotation to help optimise returns.

Case study

William Edwards

Hardingham Farms, Norfolk

Detailed budgeting based on realistic figures and a clear idea of production costs is central to the management of Hardingham Farms in mid-Norfolk. That focus assumes added significance during such unpredictable times, says the farm’s William Edwards, who is also a director at farm buying co-op, AF.

“I work out my cost of production, and follow commodity markets closely. This allows me to forward sell tranches of crop once I know the price will deliver a profit. But every business is different, depending on cashflow. Many farmers had quite a profitable harvest in 2022, but some simply can’t afford the upfront input costs and are taking land out of production.”

Hardingham Farms covers 1,200 ha of mixed cropping for several landowners and while it has always been managed with a keen eye on costs, Mr Edwards recognises this must not be at the expense of yield.

“On the whole, we are fortunate enough to operate a higher input, higher output system. If you’ve sold crop forward, at a price you know is profitable, it’s easier to justify spending money on it to ensure it delivers. Equally, if crops really don’t look good, we will reduce inputs.

Mr Edwards is continually looking to maintain and improve productivity, amidst rising costs. Fixed costs are the focus, especially given increasing machinery prices and the high capital investment required to maintain a reliable fleet.

“The cost of machinery has risen way beyond anything else and the cap-ex budget simply doesn’t go far enough now. It really worries me how we’ll keep a fleet of decent tractors going with good machinery. Nowadays, with fewer tractors we can’t afford to lose time to breakdowns.”

To address this, last autumn, following the departure of his farm manager, the business entered into a temporary joint venture with a neighbour to share drilling machinery and labour across a combined area of 1,800 ha (4,500 acres).

The neighbouring farm’s newer six-metre Horsch drill and main tractor were used across the whole area, while Hardingham Farms provided the main cultivation tractor and equipment.

“We always used to worry about cutting variable costs, but for me, fixed costs have become the new variable. Fixed costs aren’t fixed and there are ways of changing them. Labour is the biggest one, so if I can go from farming my acreage to adding another 1,500 acres of combinable crops with my two men, that shows how much you can stretch it with modern machinery.

“But, equipment has to be reliable and there needs to be support in the event of a problem, so you can be up and running quickly.”

This article is an extract from CropFocus magazine, if you would like to sign up for the next issue please sign up here