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Independent.ie

Sunday 25 February 2018

Farmers are running to stand still on profit margins

In real terms, milk and beef prices are now only worth about 50pc of their values in the early 1980s

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Martin O'Sullivan

I recently had reason to research farm produce prices in the early 1980s and relate them to today's prices in real terms.

While I was in no doubt that the exercise would only confirm what I already knew in terms of the extent of the disparity between how prices in 1981 compared in real terms with prices today, the contrast is startling.

Table A sets out prices for beef, barley and milk in 1981 and compares them with today's prices. Milk and beef are currently about 50pc of the 1981 price in real terms, with barley less than 30pc of that figure.

MOS Table a.PNG

Interestingly, land values have maintained their real value.

If it were not for substantial efficiencies and productivity increases in the meantime along with subsidisation, the story would be an awful lot worse.

Unfortunately, subsidisation is reducing and area-based support is also dwindling.

If that wasn't bad enough, restrictions in the use of chemical sprays and fertilisers will undoubtedly hamper future productivity gains - which apart from direct subsidisation have been farmer's salvation over the past three decades.

This prompts me to pose the question, is it time to wake up and smell the coffee?

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The following analysis of comparative gross margins may provide that wake-up call.

GROSS MARGIN COMPARISON

Notwithstanding the fact that productivity has increased substantially in all sectors and that subsidies have compensated to some extent, the comparison of gross margins between 1981 and 2017 as set out in Table B (source: An Foras Taluntais Farm Management Manual, ACA Farmers Handbook 2017) further confirms that we have lost significant ground in the intervening 36 years.

The figures for both 1981 and 2017 are based on what would have been regarded at the respective times as moderate to good levels of efficiency. Milk production has fared reasonably well, mainly due to a 35pc increase in average milk yields, but still has lost ground in real terms by 24pc.

The real drop in suckler beef production gross margin is somewhat more serious at 34pc but one could argue that beef was not very profitable then and is less so now.

While these figures are worrying, the case of sheep and cereals is downright disastrous.

A mid-season lamb-producing ewe earned a gross margin of €70 in 1981, which is equivalent to €252 in today's terms, but the gross margin in 2017 is €105, a fall of 58pc in real terms.

If you consider that bad, well then cereal margins could only be described as a total meltdown. The actual gross margin for winter wheat in 1981 was €220 per acre, which when adjusted for inflation is equivalent to €792 in today's money.

This compares with a gross margin of €221 in 2017, a drop of 72pc. Spring barley is slightly worse.

So in essence the return in 2017 is practically identical to 1981 despite the fact that it would require €3.60 today to match the buying power of €1 in 1981. If cereal farmers are feeling despondent, it is with considerable justification.

CONSUMERS

Is there any reason to think that the unabated erosion of margins will not continue? I think not, for the following reasons.

Firstly, consumers are not going to ease up in their relentless pursuit of lower prices.

Secondly, the ever-increasing scale of operations for most farm enterprises in order to achieve economy of scale will enable the bigger producers to compete in a price-sensitive market, thereby meeting market demands, while the smaller producer will be squeezed out.

The pig industry is a prime example of this, where the number of commercial herds is now in the region of 300 having been a farmyard enterprise on most farms in the not-too-distant past.

This begs the question, if there is not a viable commercial return from cereals, sheep and beef, what do these farmers do with their farms?

THE FUTURE

It is an accepted fact that leasing out one's land will generally leave a greater after-tax income than beef, sheep or tillage farming.

So why don't more farmers lease their land, given that their average age is close to 60 years. The answer in most instances is that money isn't everything and that having something to do when one gets up in the morning can be more important.

Also, farming for many is a lifestyle choice not motivated by profitability but rather by tradition and a desire to pass on an active farm for future generations to do as they will.

That said, there is a growing number who see long-term leasing as an attractive alternative to the daily slog of having to run faster to keep up with ever-diminishing produce prices in real terms and ever-increasing costs.

There are other possibilities opening up to such landowners based on collaborative arrangements with other farmers such as share farming, partnerships, contract rearing or contract forage production. Such arrangements can be quite profitable and can be tailored to the individual farmer's requirements.

The explosion in milk production is likely to see the emergence of or variations on some of the New Zealand models of share-farming or share-milking. Farmers have proven over the decades to be very resilient, inventive and innovative when necessity beckoned.

A shortage of land and labour is bound to throw up some new ideas that will open avenues of opportunity for landowners that may require not alone their land but also their labour.

Notwithstanding the Brexit threat I see the future as being bright but the powers that be must continue to identify and promote areas of opportunity while accepting that scale is necessary and inevitable.

The dairy industry is our main strength and has been in terms of profitability since I started as a young farm advisor 40 years ago.

The figures in Table B confirm this notwithstanding the fact that margins have lost ground, but on the other hand scale has compensated.

Martin O'Sullivan is the author of the ACA Farmers Handbook. He is a partner in O'Sullivan Malone and Company, accountants and registered auditors; www.som.ie

Do you have a question for our team of experts? Email farming@independent.ie or by post to: Farming Independent, Independent House, 27-32 Talbot St, Dublin 1


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