Financing the Farm Business – CAFRE

October 7, 2022

Input costs have risen sharply over the past year pushing gas, fuel and grain prices to record highs. Indeed, there is no immediate indication of any significant reductions. Energy prices remain high, with uncertainty over supplies of natural gas in the coming months. There is also some concern regarding European grain yields as a result of drought conditions. In general output prices have been good for ruminant and arable sectors, which may be helping to offset higher input costs. However not all sectors are in this position notably pigs and poultry. 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. It is therefore vitally important that farmers do all they can to manage their business costs over the winter period.

Feed

Feed and forage accounts for approximately 70% of total input costs on a typical livestock farm. Most farms will now have the majority of their winter forage saved. It is essential that farmers get their forage analysed now to enable a winter feed plan to be formulated. Knowing the optimum quantity of meal to feed to dairy cows or finishing cattle based on forage analysis can save on expensive concentrates this winter.  Silage quality can be categorised as good, average or poor feed value depending on analysis results as shown in Table 1.

Table 1: Silage Feed Value

  Poor Average Good
Silage intake potential 80 90 100
Dry matter % 17 20 25
ME (MJ/kg DM) 9.0 10.5 11.5
Crude protein (% DM) 9 13 15

The concentrate level required to feed an 8500 litre Dairy cow fed average silage this winter is 12.5kg/day, but if good silage is fed this reduces to 9kg/day. Over a 180 day winter period this is a difference of 630Kg of concentrates at £400/tonne which is £252 per cow. Knowing the quality and quantity of silage on your farm is essential to determine the optimum level of concentrate supplementation this winter.

Energy

Electricity is another input which has increased significantly in cost and has the potential to impact profit margins on farms. Farmers should consider all options to reduce electricity costs for example installing plate coolers, timer switches, heating water using cheaper off-peak tariffs, comparing different energy suppliers, using LED lights and investing in variable speed vacuum pumps for milking. 

Forwarding buying inputs

The amount of cash available in businesses varies but where there is scope to forward buy some inputs to mitigate against further price rises and possible supply issues, then this should be considered.

Cash flow

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. Keep in mind that if higher profits materialise this usually means that tax bills will 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.

Finance

When it comes to purchasing inputs, 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 stay within the credit terms as customers who are better payers often will be prioritised when supplying scare commodities such as fertiliser. 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 may not extend your overdraft to finance inputs like concentrates 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. 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. The Bank of England has raised interest rates recently so the additional cost of borrowing must be factored in when meeting repayments.

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. 

Summary

There remains great uncertainty as to how long input prices will remain at their current levels and how this will impact farm businesses in the longer term. However, farmers should continue to assess their finances at least monthly. A cashflow is a very helpful tool to identify any interventions which may be required over the coming months to keep finances healthy this winter. If you feel your personal circumstances require additional help, contact Rural Support  at 0800 138 1678 where farm business and finance advice is available.  

Source link

Show More