All conventional farming businesses have been affected by increasing costs. As well as sector specific cost increases, such as fertiliser, the consumer prices index (CPI), rose by 7% in the 12 months to March 2022, the highest seen since March 1992, and is expected to hit 10% by the end of the year.
Businesses which have diversified into other areas, such as leisure and tourism have also been affected. With the general public’s disposable income being squeezed, the true effect of this may not be seen until later in the year.
The sales price of cereals has seen an increase in value by nearly 50%. It is difficult to know whether this is enough (with the increased costs), to make an arable business profitable.
Fertiliser prices have rocketed from £283 per tonne back in March 2021, to £839 per tonne in March 2022. This is a 196% increase in just one year. Many farmers will have to make a difficult decision by weighing up the value of adding fertiliser against the potential increased yield.
Red diesel has nearly doubled in price over the year. In March 2021 it was at 59.95ppl, whereas in March 2022 it was 96.02ppl and could continue to rise. Will farmers weigh up the true cost of hauling silage and corn from a distance? Will farmers move away from conventional planting methods and use direct drilling?
In early May 2022 the Bank of England increased the base rate of interest to 1.00%. This has increased from 0.10% in less than five months. Those with variable interest loans will see their costs increase which will impact the business cash and overall profitability.
Monitoring Your Cashflow
With costs continuing to rise, many businesses are having to monitor their cashflow. To afford the increased price of inputs and overheads, many farmers are going to have to consider the timing of sales. They may decide to sell their stock earlier than normal, thereby realising profits earlier. This could affect the year end accounts since profits and possible tax liabilities would be brought forward, as stock is generally valued at the cost of production or at deemed cost which is 60-75% of the market value.
To aid cashflow, the Government announced they will bring forward the payment of 50% of the 2022 basic payment scheme due in December 2022, to July. The balance of the payment being paid as normal in December. Whilst this is welcome news to many farmers, and will help cover the payment of increased input costs, businesses need to be prepared for the reduced payment in December as this is generally when farming income is reduced.
Farmers are used to fluctuations in income and profits; however, the vast increase in costs is not a regular occurrence. The timing of when inputs are purchased, and stock sold, will have a real bearing on the 2022 profits. For example:
An arable farmer with a March year end pre-purchased their fertiliser for application on the 2022 harvest back in the early summer of 2021 costing £280 per tonne. In the 31 March 2022 accounts this cost will be carried forward in stock as part of the growing crop valuation. Due to the current prices, there is potential for the 2022 harvest turnover to be high, this is likely to create healthy profits in the year end to 31 March 2023. Any fertiliser purchased at the current inflated price for the 2023 harvest, will be carried forward in stock and have no bearing on the March 2023 profits. This could lead to an unexpected large tax charge in January 2024 when cash in the business might be stretched.
Farmers averaging will help smooth the fluctuations in farming profits, but understanding your position and being able to make informed decisions will be critical to ensuring the business has cash when needed.
If you would like any help with cash flow monitoring or profit forecasts, please contact Jeremy Kirby or your usual Hazlewoods contact on 01242 680000 or firstname.lastname@example.org