Yields

In contrast to the record high yields reported for harvest 2015, average yields fell by around 13%. Reduced average sunshine hours in June and July 2016 contributed to the lower yields. In fact, harvest 2016 yields were just 6% higher than those recorded in harvest 2013 when the UK suffered severe flooding through the wettest December since 1999, which was followed by a cold spring and dry summer.

Crop price

The impact of lower yields on gross margins was offset by an overall 9% rise in average crop prices for the harvest 2016 year compared with 2015. But yields are only one factor affecting crop price.

We are seeing a record global wheat supply with current stocks-to-use ratio at nearly 34% (USDA figures, April 2017). This produced a global drop in commodity prices. It should have signified further decreases in ex-farm prices for UK growers, but political and financial turmoil in 2016 created a weakening of the British pound and offered a cushion against the drop in the global crop price as export demand for UK crop rose.

^{Source: Savills Research}

^{Source: Savills Research}

Costs of production

There are various factors outside the farming operation that impact on the farm’s bottom line, many of which are out of the farmers’ control. These include price inflation on chemicals and the uncertainty of the fertiliser markets. Therefore, purchasing strategy is a key management requirement as the price point at which purchases are made can make a significant difference to costs of production.

Figure 3 illustrates the power, machinery and labour costs along with variable costs as a percentage of the average crop price. On average, the fixed costs remain a smaller proportion of the crop price in contract farming agreements (CFA) than for in-hand (IH) operations. Variable costs are similar across the different farming operations and are a growing proportion of the crop price.

^{Source: Savills Research}

Analysing power, machinery and labour

Harvest 2016 recorded a marginal £2 per hectare reduction in total average power, machinery and labour costs compared with harvest 2015 for IH farms. The data reveals savings were made in contracting charges and machinery costs with depreciation falling further for harvest 2016. The largest individual fixed cost for IH farms is labour which, after a drop during the harvest 2015 year, increased to £133 per hectare – that is more in line with the average of the past four years.

Contractor charges rose by 3% for CFA operations, but, as reported for harvest 2014 and 2015, the benefits of CFA operations are evident through reduced average fixed costs to the farmer.

Analysis of fixed costs as a proportion of gross combinable crop output (below) shows opportunities for improved efficiencies and performance by the range of results between the top and bottom 10% of farms.

Where farmers are using CFAs, the fixed costs as a proportion of the gross combinable output continue to be lower compared with IH operations.

^{Source: Savills Research}

Performance indicators

During the past three harvest years, the difference between the top 10% and bottom 10% of farms is wider for tractor hours per hectare (top 10%, 2.46hr/ha; bottom 10%, 7.11hr/ha) and field fuel use (top 10%, 7.4l/crop tonne; bottom 10%, 23.61l/crop tonne). Their influence on farm business profitability is significant.

Contract farming: a growing trend

Our survey shows how farmers are able to make cost savings within CFA operations as contractors benefit from economies of scale because fixed costs are spread across larger areas.

In addition, the farmer is not required to invest in labour and machinery that might not be utilised all year round. The table above compares the average harvest 2016 return (after power, machinery and labour and excluding subsidy) of IH and CFA operations to the farmer.

The following page considers what may trigger a change in farming structure and looks at contract farming agreements.

^{Source: Savills Research}