Tillage: Do your sums before renting any more land
With crops harvested and animals being taken off land, now is the time for commercial farmers to make the financial decision on land rental for the coming year or years. Costs and returns from each block of rented lands should be analysed in order to determine their viability.
Lands which do not make money should be dropped unless you have some other motive which you are prepared to finance with money earned elsewhere.
Every year farmers make money (hopefully) on some enterprises and unfortunately lose some of it on others. If the loss makers are eliminated farm profits will improve. Profit is the difference between sales and expenses.
Farmers are price takers when it comes to sales and have very little control over input prices such as fertilisers, seeds, sprays, machinery or contractor charges. Farmers do however have control over the price of cattle purchased at the mart and conacre bought on the open market.
They complain of cattle and land being too dear and continue to bid until there is no prospect of any profit being made. If you are bidding against someone whose motivation is not profit you have very little prospect of buying.
The big fear among tillage farmers about conacre prices was the impact of dairy expansion. However the shock of this year's milk price dip has changed the situation for the dairy man.
Production costs range from 20 to 30c/l and a milk price of 32c/l leaves a margin of 2 to 12c/l. If he rents 50 acres for an extra 50 cows, each producing 5,000l, he would have a margin of €5,000 (at costs of 30c/l) to €30,000 (at costs of 20c/l) before costs such as land rental payments and labour and so on.
The current advice to him is not to pay more than €150/ac for grassland land away from the main grazing block and up to €230 if he can knock a gap in the ditch to access the land.
Land currently in tillage will cost €300/ac to reseed and will take three to four years before grass production matches that of a new reseed on land that was previously in grass.
Profit/ac from cattle or sheep is less than half of that from dairying so the maximum price for grassland is less that €100/ac and in many cases land rental at any price is uneconomic. The justification in the past to rent land was to have enough to draw down entitlements.
However the combination of reduced basic payments due to convergence and lack of profitability in farming may make sale or leasing out of entitlements the correct financial decision.
Economy of scale
Now to the tillage farmer. They have made money, lost money and continue to seek the elusive 'economy of scale'.
As I was starting to write this article I had a call from a client who described the 1984 harvest as being very similar to this year. In April he was debating ploughing up a poorly established spring barley crop but decided to stick with it.
It yielded 2.9t/ac for which he got £165/t (€209/t) for malting. He had paid £55/t (€70/t) for nitrogen. Conacre the following spring made up to £100 (€127/ac). This year he had another poor looking crop of spring barley, but not bad enough to consider resowing. It yielded 3.1t/ac for which he received €145/t. The price of conacre for next spring is up to you.
The cost of seed fertiliser and sprays for spring barley will be €200 to €250/ac. The cost of your own machinery and additional labour will range from €100/ac to €190/ac. These give an average cost of €370/ac requiring 2.5t/ac at €130/t and €45/ac for straw to breakeven. The estimate does not make any provision for conacre price, general farm overheads or extra costs for travelling to land.
As for all farm enterprises to only way of estimating production costs is to determine and allocate all expenses. Farmers have no trouble with determining total expenses but the fun starts when it comes to their allocation and becomes more difficult when attempting to decide on the impact of increasing or decreasing area. If the current machinery cost on a 300ac farm is €38,000 what will the impact be of decreasing the area to 200ac or increasing it to 400ac. In the short term decreasing area will increase machinery costs /ac but in the medium to long term costs are likely to be reduced.
Increasing area is likely to reduce costs in the short term but likely to result in locking you into the larger area as machinery replacement kicks in.
If your tillage enterprise is motivated by profit do your sums before you rent any further land.
PJ Phelan is a tillage advisor based in Tipperary and is a member of the ACA and ITCA
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