Navigating a period of rising input costs
March 8, 2022
Farm businesses have seen input costs rise sharply over the last year, with recent events in Ukraine pushing gas, fuel and grain prices to record highs. Fertiliser prices also remain high, with uncertainty over supplies in the coming months and all other costs having been going only one way. Sales prices have also been good for many sectors, which may help to offset higher input costs, but not all sectors are in this positon. There is a real risk if input costs are not kept under control that farmers that may see profit margins shrink over the coming year. Jason McFerran, Senior Business Technologist at the College of Agriculture, Food and Rural Enterprise (CAFRE) outlines what farmers can do to manage their business costs at this time.
Cash flow projections should be carried out for the next 12 months to determine whether action is needed to ensure adequate funds are available to cover higher input costs.
Cash is essential for farms to operate and meet monthly running costs. Cash flow is simply the movement of money into and out of your business. A cash flow budget should include realistic estimates of the level of production, prices and timescales. Cash is needed throughout the year but is not spread evenly across the months, as there are certain times when large expenses such as conacre or a contractor bill must be paid. Also keep in mind that if higher profits materialise this usually means that tax bills will be also be higher. Speak to your accountant to discuss the options available.
Whilst looking at cash flow, it makes sense to review all expenditure, to ensure it is both absolutely necessary and good value for money. A good starting point is to review your farm bank statements over the last year and use this to plan ahead. Ask yourself, what, if anything can be done without.
A cash flow budget highlights times in the year when borrowing money may be necessary to keep the business going until sufficient income is generated. It also shows when peak borrowing will occur. This allows you to identify your maximum requirement for finance. A bank overdraft is ideal for short term, flexible borrowing, but not for longer term or fixed borrowing. CAFRE has a cash flow template available here www.cafre.ac.uk/CAFREcashflow.
Review fertiliser policy
There has never been a better time to review your fertiliser policy, to identify any potential efficiencies that can be made. Soil and slurry analysis should be carried out to help determine fertiliser requirements, paying attention to pH levels. Applying lime to correct deficiencies is the most cost effective way to make better use of applied fertilisers.
When it comes to purchasing fertiliser, have a plan for how you will pay for it. If you need to borrow money for a short period until cash flow improves, you can make use of any slack in your existing overdraft facility. In many cases, merchant credit may not be available, with payment required on delivery. If it is available, be careful to check if interest will be added to your bill. If the interest rate is quoted as a monthly rate, e.g. 2%, this equates to an annual interest rate of 24%. Banks will most likely not extend your overdraft to finance inputs like fertiliser, but are well aware of the rising costs and potential cash flow difficulties faced by farmers. Speak to your bank or credit union to arrange a short term loan if required. They will most likely require this to be paid back within six months or when the Basic Payment lands in your account. Interest rates on loans may vary greatly and total repayments will also vary depending on how the interest is calculated. Always ask for specific details of how much the loan will cost in total, including any setup fees.
Borrowing £10,000 for one year at annual interest rate of 5% will cost approximately £250 and at 10% approximately £500. If the loan is only for 6 months, then these costs will be halved.
Overall, there remains great uncertainty as to how much more input prices will rise and how this will impact farm businesses. It is however, vital to look ahead, assess your cash flow and make a plan now.