Lower cost base crucial to farm business resilience

Getting structure right will help navigate period of uncertainty ahead

A transitional deal followed by an equivalent trading relationship to the present might be considered to be the best-case scenario for farmers and would mean that the major impacts are likely to be in direct support policy decisions rather than market conditions. In which case, the majority of farmers have to focus on the key economic principle – that they are commodity producers and price takers and not price makers.

So operating from a lower cost base is crucial. Almost exclusively, studies looking at whole farm profitability identify the most common attribute of those businesses in the top quartile of profitability is that they have a lower cost base than their competitors.

In addition to looking at costs within their current system, farmers should ask themselves whether by changing or reducing the number of enterprises they operate would they be able to sustain better profit levels? Do they continue with the beef finishing or vegetable enterprise, or would a simpler system specialising in producing store cattle or combinable crops be more profitable?

It is repetitive but important that the industry talks about it. Getting cost structure right is one of those major factors which will determine whether a business can get through this next period successfully or not. It gives a business the ability to make profits when there is increased output while ensuring that in periods of low output they do not have to draw on capital reserves.

If there were to be no trade agreement covering Europe and associated markets, far larger changes may occur and the single key impact and question would be over the marketplace.

Where the UK is currently a net importer, beef, pigs, milk, poultry, prices may rise as the domestic sector is protected by tariffs.

However, where the UK is a net exporter, lamb and to an extent cereals, prices are likely to fall. Whilst superficially potentially good news for UK farming (excepting sheep producers), this ignores the likely subsequent effects.

Increased prices will affect consumers, are unlikely to be politically acceptable and perhaps within a relatively short timescale, free trade agreements with other countries (New Zealand, Australia, Brazil etc) are likely to emerge, opening up the UK market to lower-priced competition.

In this scenario, as well as yet further pressure to address cost structure and cut costs of production, many farmers may need to make much more radical change. Farming systems which were once economic may simply no longer work.

Understanding the marketplace and forging direct links with retailers or consumers for a specific product at a price at which they can make a profit may be an opportunity for some. This, along with other diversifying options may provide a more resilient business environment for some producers.

Farmers might also take other actions to be more resilient such as: spreading their selling contracts – sell forward/ use different strategies; spreading their purchasing risk – buying groups, buying early; investment. If they can invest in expansion or new technology while interest rates are low there might be most to gain. These options will be less transformational than other whole business options, however, when done in combination they can have a positive impact.