The results of the 2019 harvest are emerging and it has proven to be a bumper year for UK wheat and barley production.
The DEFRA farming statistics report issued on 8 October 2019 reports that the UK wheat harvest is up 20.1% on the total output for 2018, yielding a total estimate of 16.3m tonnes compared to 13.6m tonnes for the previous year.
Commodity price volatility will always be a risk to the farmer, but the gross margins should be in sharp focus to measure profitability as one aspect of how sustainable the farm enterprise is as speculation continues about subsidy reform as a consequence of the UK’s withdrawal from the EU. As important as reviewing the year-end profit forecast to make short term decisions is, it is equally important to appraise the strategic wellbeing of the farm to ensure that it remains in the strongest position to survive anticipated changes to the farming industry and rural economy. Is your management information giving you financial insight? Can I service my debt without subsidy and meet my other outgoings? Do all my assets generate a return or can it be improved? Is my farm fit for succession, financially and structurally? If the answer to any of those questions is “no” or “I’m not sure” then I recommend you reflect on any action that might be required to improve the wellbeing of your farm enterprise and take appropriate advice. Consider some of these questions:
2014 2015 2016 2017 2018 2019
m/t
16.6
16.4
14.5
14.8
13.6
16.3
Source: DEFRA
Inevitably this has led to a sharp reduction in wheat price since the start of the year. In January 2019 wheat was £170/t and at the time of writing at the end of October, the spot price is £128/t, a fall of some 25%.
Feed Wheat Futures Prices £/t
120 130 140 150 160 170 180 190
Sep-18
Oct-19
Client
Source: AHDB, www.fwi.co.uk
It is interesting to observe the market price behaviour year on year, which has been the basis of my articles in the autumn editions of Adviser magazine since 2017. Comparison of future prices as at September 2018 with the actual prices and future prices as at October 2019 shows that the fall in market price anticipated is sooner and sharper than expected, a reaction to the harvest results no doubt. The political climate and fears of potential constraints on export by tariff or trade agreement together with the movement in exchange rate also influence the market price. The farmer’s gross margin and therefore profitability is a function of this price volatility. In a global commodity market the farmer is a price taker, unable to influence the price other than participating in grain pools managed by traders who perhaps have more information available to read the markets. I recently undertook some year-end planning with one of my clients trying to ascertain the level of profitability to consider capital investment and pension planning to mitigate tax. It is interesting to plot the prices my client had sold forward against the futures index. The contract price was secured in August ahead of the emerging harvest volume which has weakened prices since then. It is pleasing to report that my client has ultimately gained, achieving a price approximately 8% above the actual or forecast market price. However at the time of our planning activity he had only sold forward 53% of his wheat crop, with approximately 1,200 tonnes in store not subject to contract. The contract price secured for April 2020 was £156/t. The future price is now £151/t so, unless price strengthens, the lost revenue on the crop remaining is potentially £6,000. My client has sufficient storage to hold for price to strengthen subject to the cash need of the farm to establish next year’s crops.
At Scrutton Bland we have a team of specialist advisers who work with our agricultural clients as advisory partners to challenge and support our clients in meeting their objectives and ensure that, as far as possible, their farm enterprise can be an enduring asset for future generations.
Please contact Nick Banks at nick.banks@scruttonbland.co.uk or tel 01473 939171 for more information.
A G R I C U L T U R E | S C R U T T O N B L A N D | 1 9
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