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
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.
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:
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.
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.