Knowing your crop net margins – are they all performing as you expect?

We cannot hide from the fact that the unprecedented rainfall since October 2023, combined with a severe drop in crop prices is going to make harvests 2024 and 2025 challenging. Furthermore, the continued decline in Basic Payment, on which many farmers have been reliant to make a profit, removes the long-standing safety net, so understanding your costs and knowing what each crop costs to produce is essential to make informed business decisions during a period of economic volatility and uncertainty.

The volatility and uncertainty of farming without subsidies must be managed. This starts by understanding your net margins and cost of production. Usually, there is little to be done with yields and inputs but, moving forwards, profitability is going to be won or lost with fixed costs. Fixed cost structures for many farm businesses are still inappropriate and far too high, sapping any available profit from crop and livestock production. Many farms with low fixed cost structures will make a profit without BPS, even in poorer years. This must be the starting point of farming without subsidy.

A series of storms including Storm Babet (pictured October 2023) caused major flooding across the UK affecting agricultural land.

The next step for most farmers is understanding the profitability of each crop and/or enterprise. This can make a big difference as to when to sell that crop or even bother growing it at all – after all timings have been crucial over the last few years, which some may argue has been more down to luck.  By taking the output and variable costs for each crop, and the fixed costs for the business, which can be split across crops by percentage area or percentage turnover, you can quickly arrive at a net margin for each crop to understand profitability.

Sustainable Farming Incentive can offer suitable alternatives and partial to full mitigation of BPS loss.  With the increase in payment rates for many of the SFI options, they now look even more viable and offer a risk-free alternative to unviable/high risk break crops. It is usually the case that farmers are often already doing many of the actions available in SFI alongside production. SFI also operates on a quarterly payment basis which can help cashflow.

All farming businesses should be reviewing their crop and livestock net margins to ensure viability, then making strong business decisions to make the farm as resilient as possible. SFI can form part of this decision making, but the first step to solving the issues is knowing where the issue lies.

Brown&Co is still undertaking DEFRA’s free Future Farming Resilience Fund which can involve discussions around net margins, cost of production and the Sustainable Farming Incentive.

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Tom Cheer - Agri-Business Consultant

Chris Sheldon - Agri-Business Consultant