30 Oct, 2021

Rising costs and tight profit margins make budgeting and cashflow management more important than ever

From a financial perspective, 2021 has been a good year on most Irish farms, writes Philip O'Conor, Head of Farm Support. Originally seen in the Irish Farmers Journal on October 27th.

From a financial perspective, 2021 has been a good year on most Irish farms. Commodity prices are up for milk, beef and lamb. Input prices were relatively stable for the first nine months and 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.

Looking to 2022, while the outlook for dairy, beef and lamb prices is bullish, rising input costs will hit profit margins. Currently 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 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 profitability next year.

Example 1: Dairy Partnership with 148 Spring calving cows on 78ha

Example 2: Farm with 40 Suckler cows, 110 ewes, 20 bought in calves, 64 ha, 28 ha rented

Note: Above figures do not include, subside payments, loan interest or depreciation. 2022 figures are a 2020/21 average with fertiliser increased by 100% and feed by 20%, all other costs increased by 3%. Income figures are based on a two year average. These figures do NOT inculded farmers own drawings / wages

The examples above also include other costs increased at 3% inline with consumer price index increases, such as diesel, contractor, and energy costs, all of which are rising at the moment due to global factors.

In Example 1, production costs for this dairy farmer will increase by almost 5 cent per litre due to higher fertiliser costs (forecast to be up 100% in 2022 when compared to 2021) with feed costs forecast to rise by 20%.

Beef farmers are likely to see input costs increase by €187 per ha.

The impact of cost hikes could see profits fall by as much as 50% on dairy farms and 60% on livestock farms next year assuming outprice remain at a 2 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 include:

  • 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.

  • Consider whether slurry could replace chemical nitrogen for your first rotation.

  • Measure grass to target areas where fertiliser can be reduced and target fertiliser at your less productive areas.

  • 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?

If cashflow looking like an issue in 2022 plan for now – SBCI loans? Use savings?

Prepare a budget

Working out your fertiliser, concentrate and feed requirements will help you estimate what you need to budget for in the coming year. You also need to look at both your income sources and any other costs you expect to incur. Once you have this information, you will be able to produce a financial budget and predict whether you will be cash positive or negative in 2022. If you expect to be cash negative after drawings, loan repayments and tax, you need to examine funding options. Now is the time to review cashflow and potentially look at funding options not next spring if the farm runs into cashflow issues.

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 6 years.

Other 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 in this regard include:

  • Will new BISS payments mean a drop in come 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.

Questions to identify common farm business risks

  • Is your stocking rate too high, putting pressure on the farm 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 multi species swards? To reduce reliance on chemical nitrogen

  • Is fertiliser being wasted? Do you have a fertiliser plan? Maybe consider technology such as GPS to reduce waste

  • How efficient is your farm now? Are you benchmarking to find areas where margins can be improved?

  • Nitrates – will your farm need investment in the future?

  • Business structure – are you in the right structure going forward to cater for – tax, potential capital investments, succession?

Seek advice

Your accountant and agricultural advisor 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. In Ifac, we always promote the concept of a ‘farming team’ where farmer, accountant and agricultural advisor work together for the benefit of the farm. By bringing all of your professional advice together, you get a deeper understanding of your business which enables you to identify and address potential problems, grab opportunities, and make the right decisions at the right time so that your farm can survive and thrive both now and in the future.

For the original article visit the Irish Farmers Journal.