07/12/07
Well it has finally happened. Certain London fund managers were
predicting it and farmers were hoping it would happen. Agricultural
commodities have been on a world class roller coaster this year,
that’s for sure. Some farmers have sold well and the rest
have had a better average than previous years. Where does this
leave farmers now?
James Goodson
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James Goodson, farmer and farming consultant at Fisher
German advises, “I have always taken the view and
encouraged farmers to have some form of crop marketing
policy, but this year, those farmers who have filled the
shed and picked up the phone have been those who have seen
the most benefit in the price rises this year. That said
I still firmly believe that all farmers should make more
time to consider the sale of the crop by discussing options
or contracts with traders and seeking out local homes for
their crops.”
What benefits do farmers receive in selling crops forward,
using options or other methods of sale? The short
answer, it’s all about locking in a margin. The businesses
who purchase the crops, whether they are food mills, bakers
or brewers know that the cost of raw material (i.e. crops)
has a massive effect on their margins. Farmers need to
protect their margins and reduce exposure to volatile markets
and rising fixed and variable costs. It may be worth investigating
whether forward deals can be done on not only crops sales,
but fertiliser, fuel and energy costs as well and of course
rents.
Continued assessment of the performance and the reduction
of business risk will give better peace of mind and perhaps
more protection to the ups and downs witnessed in recent
years. Be warned though, those arable farmers with a high
cost structure to their business who are breathing a sigh
of relief after many years of losses and erosion of net
worth should seek to assess business profitability and
enterprise risk reward, as the ‘bull run’ might
not last!
In addition to protecting the arable side of the business
to wild fluctuations in commodity prices and increasing
machinery and variable costs, farmers must keep a weather
eye on the profitability of each enterprise on the farm
and not let the recent increases in crop returns subsidise
other possibly poorer performing elements of the business.
Of course, whilst arable enterprises have benefited, livestock
enterprises have seen food costs increase, thus putting
further strain on livestock margins that are already under
pressure from other factors. Many farmers have already
decided to discontinue their livestock enterprises in the
light of these changes.
For those livestock farmers seeing returns erode further
due to food cost increases, it is now even more important
to complete farm cashflows, assess future finance requirements
and work out whether the enterprise can survive with feed
raw material costs at levels of £120-£180 a
ton. Some farmers will be able to continue due to low debt
levels, others will find it difficult as rent and finance
figures may be high. James comments, “Whatever the
situation, losses year on year are not sustainable and
I find it easier to converse with farmers who can make
the decisions rather than the decisions for change being
taken out of their hands - this is never a good situation!”
If the business decides on a different course of action
and enterprises are reduced or even given up completely,
this change should certainly not be seen as any admission
of failure. All family members both directly and indirectly
involved in the business should talk candidly with each
other about what they want to achieve from the farm. For
the business to be profitable and net worth retained, farmers
must learn that nothing is ever constant and if change
needs to be made to enable the farm to continue then so
be it. There is no stigma to good financial sense. Never
worry what other people think - it’s your business
and your family that counts!
This article is intended to be an informative guide and
the opinions offered should not be relied on wholly for
the advice that may be needed in specific circumstances.
For further advice contact James Goodson on 01858 410 200
or visit www.fishergerman.co.uk.
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