Yields
Yields for the 2017 harvest year were variable; average yields for winter wheat and spring barley fell slightly on the previous year, but winter barley and oilseed rape average yields were up by 9% and 25% respectively. Looking at five-year average, yields for the 2017 harvest year results were largely comparable.
FIGURE 1 | Average crop yields
Source: Savills Research
Income
Crop prices for the 2017 harvest year rose and this is for the second consecutive year. As a result, our 2017 harvest survey results recorded a rise in margins and therefore higher farmer returns for both in hand (IH) and contract farming agreement (CFA) operations.
As well as increased yields for winter barley and oilseed rape, significantly higher average crop prices were achieved compared to 2016. The weak pound helped strengthen crop prices, and according to the AHDB, an increase in the use of compound feeds within the livestock sector increased demand for UK barley in particular.
FIGURE 2 | Average crop prices
Source: Savills Research
Costs of production
Variable costs
Variable costs associated with growing the crop are largely affected by the timing of buying decisions, as well as rates and type of product used. For the 2017 harvest early purchasers of nitrogen benefited. Agrochemical costs, particularly fungicides, were affected by decisions taken in the very dry spring of 2017, which accounted for some of the general reduction in variable costs per hectare.
The spend and overall usage of herbicides in winter wheat and oilseed rape remains robust as blackgrass control from pre-emergence herbicides remains a key tool in the prevention armoury.
Fixed costs
The fixed costs associated with growing a tonne of crop such as labour, machinery and energy are spread across the whole farm meaning it is easy to treat them as unavoidable and necessary costs.
Instead businesses should allocate a proportion of fixed costs to the growing of a crop in order to fully understand the true cost of production and identify where savings can be made. Achieving economies of scale through careful planning and sharing costs across enterprises, with neighbours or entering into a CFA, can all help reduce fixed costs. If direct payments are reduced or stopped (as the Government is suggesting in its Agricultural Command Paper) then scrutinising costs will become even more important for all farm businesses.
Measuring power, machinery and labour
Figure 3 shows the proportion of the power, machinery and labour costs along with the variable costs as a percentage of the average crop price. Despite rising fixed costs, higher crop prices and generally lower variable costs have resulted in costs making up a smaller proportion of the crop price in 2017.
FIGURE 3 | Total costs as proportion of crop price
Source: Savills Research
Figure 4 compares the changes between 2016 and 2017 of power machinery and labour costs as a proportion of crop output. CFA operations continue to benefit from lower fixed costs than IH operations but a rise in contractor returns of £65 per ha compared to harvest 2016 has increased the cost to the farmer by 19% for the 2017 crop year.
FIGURE 4 | Costs as % of gross combinable output (2016 and 2017)
Source: Savills Research
The graph shows the considerable variation between businesses in power, machinery and labour cost bases. The range between highest and lowest costs continues to suggest there is much to play for in cost analysis and determining appropriate business structure whilst still being able to carry out work on a practical timely basis.
Skilled labour remains a key component of a successful business operation and whilst headline figures suggest modest inflationary increases in labour costs, actual costs to retain or attract new staff can be much higher causing cost spikes in some of the businesses surveyed.
Farmer return
Figure 5 compares the average harvest 2017 farmer return (after power, machinery and labour and excluding subsidy) of IH and CFA operations. Combinable crop gross margins are higher for the IH farms compared to the CFA businesses, however the survey reports average farmer returns are still higher in CFA operations.
FIGURE 5 | Harvest 2017 Combinable Crops farmer return (average £/ha)
Source: Savills Research
Economies of scale enable contractors to charge their customers less than the cost which farmers would incur if farming their land IH, meaning the CFA operations can benefit from lower fixed costs compared to IH operations.
Our research shows farmer returns have improved by around 75% for IH and 53% for CFA operations owing to an increase in yields and the higher crop prices.
Benchmarking UK performance
As UK farmers face the prospect of greater trade opportunities, as well as threats in a post-Brexit world, how do we compare to some other trading nations in production terms (see Figure 6)?
FIGURE 6 | Global wheat yields (average 2012–2016)
Source: FAO
Putting aside influencing factors including soil type, the weather and crop husbandry, an innovative way of benchmarking is to treat the cost of farmland as a ‘fixed cost’ and to determine the cost of acquiring land in order to grow a tonne of wheat.
For example, in Ireland, New Zealand and the UK the land cost is between $3,500 and $4,000 per tonne of wheat whereas in the US, Australia, Argentina and Brazil it is below $1,500 per tonne. In the emerging land markets of South America and Central Europe, we expect that crop yields will increase benefitting from increased investment in machinery and management.
In conclusion
UK producers are being urged to be more competitive, and with the potential prospect of the loss of direct payments, benchmarking and monitoring the costs of production will be a vital tool in the management of the crop.
In addition, sharing best practice across borders can also help to identify areas for improvement and to inform business decision making.