Rural Budgeting and Agricultural Financial Planning

The Agricultural industry has always been subject to volatility, but the last year has been extraordinary even by industry standards, highlighting the importance of budgeting and developing a strong understanding of financial performance.

Commodities and Inputs

Over the last 12 months, prices of commodities and inputs increased sharply, largely as a consequence of the war in Ukraine. Inflation has been running at around 10% which has impacted on consumers and businesses alike. Inflation has hit the pockets of consumers, which influences spending and demand for goods and services. Bank of England are currently reporting inflation at 8.7% - which is a decrease, and it is expected that this could fall quickly this year. Wholesale energy prices and fuel have reduced considerably. There is also expectation that there will be a sharp fall in the price of imported goods, largely due to production difficulties that businesses faced starting to ease.

Harvest Reporting

For harvest 2021, the average AHDB monthly feed wheat price between 1^st August 2021 and 31^st July 2022 was £239.96/t. The market range was £181.60/t in September 2021 to £320/t in May 2022 - an increase of 76%. For harvest 2022, the average AHDB monthly price between 1^st August 2022 and 30^th April 2023 is £238.99/t, with the range being £197.80 in April 2023 to £272.80/t in October 2022. Wheat and oilseed prices are continuing to fall, and this is having a significant impact on businesses that have still not sold their 2022 crop, as prices are now getting close to cost of production.

Dairy, Beef and Lamb

Looking back at 2022, we saw some historic highs for livestock as a whole for the industries surrounding dairy, beef, sheep and more. The highs of the past 12 months were mainly driven by tight supplies and strong demand from the food-service sector as eating out venues reopened, but as the old saying goes, what goes up, must come down.

GB milk production is forecast to record growth in 2023 in the region of 0.3%. GB beef production is forecast to grow slightly in 2023 due to higher cattle availability by an estimated 0.6% and GB lamb production is forecasted to increase in 2023, in the region of 8-9%, driven by higher carry-over and a broadly stable lamb crop. But consumption is expected to weaken due to the cost of living pressures and tighter consumer budgets.

Many businesses have generated strong profits on the back of harvest 2022 - despite the high input costs, commodity prices have mitigated this increase and have delivered strong margins. Despite this, working capital requirements have increased and many businesses are now facing substantial tax liabilities, which is going to pressurise cash flow. If commodity prices continue in their current trend, then margins for harvest 2023 could be under pressure - particularly after purchasing inputs at higher prices than they are today. Cash surpluses generated from harvest 2022 could be eroded quite quickly through tax and increased interest rates.

Interest Rates

Interest rates have been increased to help curtail inflation however this has had an impact on businesses that are seeking finance, re-financing or have interest only loans. Businesses should consider their debt structure and how the changes in base rate will impact their business. Base rate has increased from 0.1% in March 2020 to 4.50% in May 2023. Businesses should be stress tested to see how performance is impacted should interest rates continue to increase. As an example, borrowing £500,000 over 10 years at 4% - the annual repayments on an amortising basis were circa £61,500. With interest rates at 6% this rises to £68,000pa and at 8% this would be £74,500pa.

Budgeting and Financial Planning

The agricultural industry has always been volatile and will continue to be so. Issues with drought, disease, conflicts within countries, market price and availability of raw inputs can create a myriad challenges for business performance and cashflow. The key to managing this uncertainty is through business planning and undertaking a detailed budget to assess different scenarios, stress test the business and build in sensitivity analysis to evaluate the impact on the business. Undertaking net margin analysis will ensure the correct basket of enterprises are taken forward to deliver the strongest financial outcome. With volatility and market uncertainty, undoubtedly there will be opportunities that present themselves whereby having up to date management information will allow opportunities to be fully appraised and pursued where appropriate.

Detailed financial planning will forecast any breaches in an overdraft facility, which will allow the problem to be addressed and managed before it arrives. The short-term focus of any business should focus on working capital requirements to ensure trade can continue - this could mean reviewing existing facilities, forecasting future requirements, and reviewing long term debt obligations. A budget will allow informed decision making and is integral in facilitating discussions with banks and illustrating the mechanics of your business.

Contact the Agri-Business Consultants at your local office