I recently read a tweet that expressed the fear that every farmer feels this time of year: " Just totted up what we've spent on the arable to get to harvest this year - just shy of £700,000 to try and get £800-850,000 back (weather dependant) makes you feel a bit sick." Whilst I do not know the details it is highly likely that this refers to the return of working capital and cash and may not, in reality, be profit which in reality is likely to be marginal.
When I was an Agricultural Bank manager I used to review farmer's cash requirements and working capital overdrafts and often those farmers did not have any meaningful cash forecasts. They got away with it because costs were on a stable increase most years and single farm payment offered a certainty of income that was often the difference between profit and loss. Provided they had a good track record of repaying or reducing their seasonal income they "got away" with it.
To sense check these farmer's cash requirements I would each year right down the approximate working capital requirement for the most common combinable crops such as barley, wheat, beans and rape per acre and then sense check its ability to repay against typical yields. If they asked for too little, or more often too much I would request an explanation. This was a very simple approach, but it also helped me explain to farmers how if they bought or rented more land, how much extra cash they would need to make the farm work, an issue that too many would overlook. This was, I will be the first to admit, inadequate, but expectations of Bank support were very high in the agricultural communities regardless of individual circumstance.
Today such an approach would simply not cut it. For we have been, and continue to go through a period of substantial change in costs and returns in a highly unpredictable market place. If I was to perform a simple exercise on wheat to calculate working capital requirement per acre in October last year I would possibly come up with a figure of £550 per acre - you can correct me if you think otherwise, but I would estimate that from cost of seed, fertilizer, spray, fuel and labour. This in very simple terms would mean as current feed wheat prices (£200 per ton for simplicity) the first 2.75 tons per acre cropped simply returns the cash spent. This may mean that the cash return is there but it is totally different to the profit which will need to cover wear and tear, depreciation of machinery, administration and interest costs. If after this there is still some spare cash it may then be eaten up in the capital repayments of any debt or finance meaning the overall exercise is cash negative.
Whether this is sustainable or not is for each farmer to work out and the rest of us to consider.
I am mindful of a conversation I had in 1993 with an elderly, large and highly successful farmer and businessman whilst sat in a pub called the Golden Pheasant near Peterborough. In the conversation I wished to understand what was important to him and what made him tick. He was generous in his willingness to respond to my queries. My colleague winced when I asked him why he took the risks that farming entails. His response was simple, "You farm for the good years."
The farmer then went on to explain that because he had a large enough business he could spread his risks across many crops, but even when he was smaller and only had four or five crop types his view was the same. He explained that he viewed each crop over a period of time and through his experience regarded the risk over a number of years and how many of those would be likely to be a loss, mediocre (or break even), and bumper (highly profitable). At the time I noted some of them as follows:
Wheat - over five years bumper 1 year, mediocre 4 year.
Malting Barley - over five years bumper 2 years, mediocre 2 years, loss 1 year.
Non-malting Barley - over five years bumper 1 year, mediocre 4 years
Potatoes - over five years 2 year bumper, 2 years mediocre, 1 year loss - he added that because of the large amount of money involved bumper years could be considerable, but so are the losses in bad years meaning the spread between profits and loss was the greatest making this the highest risk.
Carrots and Parsnips - over ten years 1 year bumper, 8 years mediocre, 1 year loss.
Onions - over ten years 1 year bumper, 7 years mediocre, 2 years loss.
Rape - over five years 3 year bumper, 2 years mediocre
Brassica Vegetables - over seven years 1 year bumper, 5 years mediocre, 1 year loss.
Beans - always loss making, occasionally mediocre, but in rotation as a legume they fixed nitrogen and benefitted the following crop.
Linseed - over three years 1 year bumper, 2 years mediocre
Sugar Beet - over ten years, 9 years mediocre 1 year loss.
Maize -mediocre
Whether these words were correct or not this was thirty years ago - since then seed varieties and the chemical armoury available, let alone costs have changed against the farmer in most cases and for the farmer in a few instances. For example, I would put rape alongside potatoes in terms of investment risk. However it does show a certain way of thinking and a long term mind set in order to accept the risks of "Farming for the Good Years."