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09 Nov, 2021

Rising costs will threaten tillage margins in 2022

Tillage farmers enjoyed a good harvest in 2021 but rising costs will hit margins next year, says Philip O’Connor, Head of Farm Support. Originally seen in the Irish Farmers Journal on November 3rd.

After several years of poor harvests profit returns, 2021’s healthy yields and strong crop prices provided a welcome boost for tillage incomes this year but the gains made could be wiped out by higher fertiliser and fuel costs in 2022.

To illustrate the potential impact of inflation, we analysed the accounts of a tillage farm in the South East with circa 122ha (300 acres) of which 23ha is leased. This farm’s crop rotation policy includes Spring and Winter crops of wheat, barley, oats, oil seed rape, and beans.

EXAMPLE: 122 ha Tillage Farm in South East rotating Spring and Winter crops.

(Figures do not include depreciation, loan repayments, farmer’s wages, payments and subsides).

The figures shown represent actual sales and costs for 2020. The 2021 figures are calculated on actuals for the first 9 months of the year with a 3 month forecast to year-end. 2022 shows budgeted income and costs for the year. The calculations are based on 2-year averages with fertiliser costs estimated to increase by 100% and fuel / contractor costs estimated to increase by 7.5%.

When compared to 2021, the 2022 budget for this farm shows a sharp drop in profit (€488 per ha). This is not a position tillage farmers will want to find themselves in next year. So, what measures can be taken to minimise the impact of rising costs?

Prepare a budget

Every tillage farm is different so before you start making decisions you need to work out what your budget for next year will look like. What you don’t want to happen is that your 2021 cash surplus is wiped out by higher costs in 2022.

When preparing your budget, you need to take into account that fertiliser costs are likely to double when compared to 2021. Farmers are currently reporting quotes of €800 per tonne. The cost of fuel — another significant direct expense if you use your own machinery (or a passed-on cost if you use a contractor) — is also expected to rise by 7-10% in 2022.

Building these estimated input cost increases in to your budget will give you a good idea of the likely impact on income next year. Once you know where you stand, you can then look for opportunities to reduce your costs and maximise your profit margin.

Cost control

For tillage farmers, key areas to focus on when looking for opportunities to reduce costs and protect profit margins include:

  • Nitrogen usage — How much nitrogen will your crops need next year? Your objective should be to achieve optimum yields and maximise your profit margin. Keep in mind that using more nitrogen to drive higher yields will not be cost effective if the additional yield does not cover the cost of the fertiliser. A fertiliser merchant recently advised that the first 160kg N/Ha will achieve the greatest return of investment given current prices.

  • Alternative sources of nitrogen — Can you import organic fertiliser such as poultry litter or pig / bovine slurry? Keep in mind that there are regulations when importing slurry and you must test the quality before spreading. There is no point spreading “dirty water” which will add zero value to your crops.

  • Forward selling crops — Currently, merchants are quoting prices of circa €210 for cereal crops and €540+ for oil seed rape. By completing a financial and fertiliser budget and predicting yields, you should be able to guarantee a margin at these prices. Forward selling decreases the risk of lower crop prices next Autumn and allows you to spread next year’s costs over two years (2021 and 2022).

  • Crop rotation – While crop rotation is a medium- to long-term measure to improve soil quality and therefore reduce chemical fertiliser dependence, in the short term it is worth considering options such as Spring oil seed rape. With forward prices quoted at €540+, you should be able to predict your input costs, estimate likely yields and achieve a reasonable profit margin.

Working capital

Once you know what your costs are likely to be next year, you then need to ensure that you have enough working capital in place to cover them. It may be timely to review your farms existing credit limits, both with your bank and main merchants. Will you need to increase these to allow you carry the additional input costs. If shortfalls or cashflows are tight it may be prudent to source additional work capital facilities now and have in place for the spring. Remember if not used then no interest costs are incurred.

GPS systems

GPS can reduce fertiliser and spray usage by up to 10%. If you are not already using GPS, now might be a good time to invest. TAMS grants are available for this equipment.

Forward planning

Looking to the medium and longer term, CAP changes, environmental issues and achieving financial sustainability are among the key challenges that all farmers need to plan for. All of these issues will involve either a potential drop in income or increased expenditure. Questions to consider include:

  • Will the new BISS payments mean a drop income for your farm?

  • Can you reduce your dependence on chemical fertilisers (e.g. by better crop rotation, using lime to achieve the right PH, switching to alternative organic fertilisers)?

  • Could technologies – GPS, self-steering tractors etc, help you address these challenges?

Know your risk profile

While some of the risks that your business faces are outside of your control — market risks, changing regulations, new consumer trends — there are steps you can take to protect your business.

So, what is your risk profile? How resilient is your business? How much financial stress can it take? How much liquidity (cash) is available?

Identifying the areas where you are vulnerable will enable you to take action to reduce your risks. Examples of practical actions might include reducing your reliance on chemical fertiliser, using GPS systems to minimise waste, and reviewing loans and interest rates to see if you can achieve better value. When input costs are rising, reducing your turnover may reduce your costs by a higher % and therefore could improve your profit margin. Where is the optimum profit margin on your farm?

Seek advice

Your accountant and agricultural advisor can provide practical advice to improve the overall performance of your tillage farm and show you how your farm is doing when compared to similar farms in your sector. Benchmarking your business in this way will often highlight opportunities to enhance your operation and improve your margins.

For the original article visit the Irish Famers Journal.