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Good for Corn Worrying for Horn
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
James Goodson

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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