Commodity prices in 2021 are up for milk, beef and lamb.
Input prices were relatively stable for the first nine months.
Weather conditions for both grass and crops were excellent. Taken together, this combination of factors should result in higher profits in 2021 when compared to 2020.
However, looking to 2022, while the outlook for dairy, beef and lamb prices is bullish, rising input costs will hit profit margins.
Fertiliser prices have almost doubled when compared to this time last year, while feed prices are up by about 20%. Fuel and energy costs are also rising.
With tight margins on many farms, good cashflow management will be critical in the coming months.
Set out in the tables (below) are examples of the impact rising fertiliser and feed costs will have on the profitability of two farms in 2022.
These examples, based on real farm accounts, show actual outcomes for 2020 with forecasted year-end accounts for 2021 and 2022.
As can be seen, rising costs are set to substantially reduce cash surplus next year.
In example one, production costs for this dairy farmer will increase by almost 5c/l due to higher forecasted feed and fertiliser costs.
The impact of cost hikes could see cash surplus fall by as much as 50% on dairy farms and 60% on livestock farms next year, assuming output prices remain at a two-year average.
While the farms in our examples are forecast to remain profitable, not all farms will be so lucky.
Financial commitments such as drawings, loan repayments and tax are likely to lead to cash problems for many farmers. This is the time to look for practical ways to reduce the pressure on cashflow.
Steps to take
Revise your fertiliser plan. Check how much fertiliser you used last year and use this information to calculate how much you will need in 2022.Maximise your use of slurry. Make the most of the natural fertiliser sitting in your tanks.Measure grass to target areas where fertiliser can be reduced.Calculate how much feed you will need. How many animals are you going to carry over the winter?Complete a full financial budget for 2022, to calculate how you will pay for fertiliser/feed – will your farm be in negative cash next year?Investigate cashflow for 2022, plan for now – SBCI loans or use savings?Manage cashflow
If your profits are up in 2021, consider setting aside some cash to help tide you over next year.
If your cashflow is under pressure, review your loans and interest rates and look for opportunities to secure better value.
Where available, consider using savings to support working capital, if necessary.
Other options to consider include delaying non-essential capital expenditure or seeking funding by way of a loan. The three main banks recently launched a new round of Brexit support loans via SBCI. These have very favourable rates and are unsecured over six years.
Forward planning considerations
Looking to the medium and longer term, sustainability, measures to manage climate change and CAP reform are other significant issues on the horizon. These issues could result in a potential drop in income or increased expenditure on your farm.
Questions to think about:
Will new BISS payments mean a drop in income for your farm? Will you be able to avail of the new environmental schemes?Will your farm need to reduce stock numbers or find more land? Will you need to build additional slurry storage or upgrade existing uncovered storage?Manage risk
To manage your business effectively, you also need to understand how much financial stress your farm can take.
Every business faces risks — some are within your own control, while others (such as market risks, regulatory changes and new consumer trends) are external. Conducting a risk assessment will help you identify where your business is vulnerable.
Identify farm business risks
Is your stocking rate too high and driving up feed costs? How reliant is your farm on leased/rented land? Will price per acre increase or could you potentially lose it?Is it time to look at clover and reduce reliance on chemical nitrogen?How efficient is your farm now? Nitrates – will your farm need future investment?Business structure – are you in the right structure to cater for – tax, potential capital investments, succession? Your accountant and agricultural adviser can provide practical advice to improve the overall performance of your business and show you how your farm is performing when compared to similar farms in your sector.
Commodity prices in 2021 are up for milk, beef and lamb.
Input prices were relatively stable for the first nine months.
Weather conditions for both grass and crops were excellent. Taken together, this combination of factors should result in higher profits in 2021 when compared to 2020.
However, looking to 2022, while the outlook for dairy, beef and lamb prices is bullish, rising input costs will hit profit margins.
Fertiliser prices have almost doubled when compared to this time last year, while feed prices are up by about 20%. Fuel and energy costs are also rising.
With tight margins on many farms, good cashflow management will be critical in the coming months.
Set out in the tables (below) are examples of the impact rising fertiliser and feed costs will have on the profitability of two farms in 2022.
These examples, based on real farm accounts, show actual outcomes for 2020 with forecasted year-end accounts for 2021 and 2022.
As can be seen, rising costs are set to substantially reduce cash surplus next year.
In example one, production costs for this dairy farmer will increase by almost 5c/l due to higher forecasted feed and fertiliser costs.
The impact of cost hikes could see cash surplus fall by as much as 50% on dairy farms and 60% on livestock farms next year, assuming output prices remain at a two-year average.
While the farms in our examples are forecast to remain profitable, not all farms will be so lucky.
Financial commitments such as drawings, loan repayments and tax are likely to lead to cash problems for many farmers. This is the time to look for practical ways to reduce the pressure on cashflow.
Steps to take
Revise your fertiliser plan. Check how much fertiliser you used last year and use this information to calculate how much you will need in 2022.Maximise your use of slurry. Make the most of the natural fertiliser sitting in your tanks.Measure grass to target areas where fertiliser can be reduced.Calculate how much feed you will need. How many animals are you going to carry over the winter?Complete a full financial budget for 2022, to calculate how you will pay for fertiliser/feed – will your farm be in negative cash next year?Investigate cashflow for 2022, plan for now – SBCI loans or use savings?Manage cashflow
If your profits are up in 2021, consider setting aside some cash to help tide you over next year.
If your cashflow is under pressure, review your loans and interest rates and look for opportunities to secure better value.
Where available, consider using savings to support working capital, if necessary.
Other options to consider include delaying non-essential capital expenditure or seeking funding by way of a loan. The three main banks recently launched a new round of Brexit support loans via SBCI. These have very favourable rates and are unsecured over six years.
Forward planning considerations
Looking to the medium and longer term, sustainability, measures to manage climate change and CAP reform are other significant issues on the horizon. These issues could result in a potential drop in income or increased expenditure on your farm.
Questions to think about:
Will new BISS payments mean a drop in income for your farm? Will you be able to avail of the new environmental schemes?Will your farm need to reduce stock numbers or find more land? Will you need to build additional slurry storage or upgrade existing uncovered storage?Manage risk
To manage your business effectively, you also need to understand how much financial stress your farm can take.
Every business faces risks — some are within your own control, while others (such as market risks, regulatory changes and new consumer trends) are external. Conducting a risk assessment will help you identify where your business is vulnerable.
Identify farm business risks
Is your stocking rate too high and driving up feed costs? How reliant is your farm on leased/rented land? Will price per acre increase or could you potentially lose it?Is it time to look at clover and reduce reliance on chemical nitrogen?How efficient is your farm now? Nitrates – will your farm need future investment?Business structure – are you in the right structure to cater for – tax, potential capital investments, succession? Your accountant and agricultural adviser can provide practical advice to improve the overall performance of your business and show you how your farm is performing when compared to similar farms in your sector.
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