UK: Land And Farming Bulletin - Winter 2013/14

Last Updated: 14 January 2014
Article by Smith & Williamson

MILKING LOW FEED PRICES - DAIRY FARM PROFITABILITY

Rising milk prices and falling feed and fertiliser costs mean the outlook for the dairy sector is far more positive than it has been for some time. This is the conclusion from the latest update of the Andersons Centre's Friesian Farm model.

Friesian Farm is a notional 150 cow business in the Midlands with a non-aligned liquid milk contract (this means the milk could end up being used by several processors). The table below shows four years' figures - the previous two, then current and future milk years. The farm just about made a margin before support payments in 2011/12 (which has not always been the case in previous years). The 2012/13 year was hit by a combination of high costs and low output which saw this business making a significant loss in terms of its milk production.

The past few months have seen rising farmgate milk prices. There is no reason to believe that current milk price levels cannot be at least maintained until the end of Friesian Farm's current financial year in March. This would give an average for the year some 3.7ppl higher than in 2012/13. At the same time Friesian Farm should face a cheaper winter than last year. Like many dairy farms, forage supplies are good, meaning a lower volume of purchased feed should be required in 2013/14. Concentrate feed prices have also reduced from their high levels of 12 months ago. This results in a sharp turnaround in profitability with a positive margin from production and a good overall business surplus.

Looking to 2014/15 we expect milk prices to ease. However, this is accompanied by a further reduction in variable costs. Feed prices are budgeted to fall slightly as the drop in grain prices fully works through into ration costs, and fertiliser looks likely to be cheaper next year. Overheads drift up slightly, and rent, finance and drawings rise. Friesian Farm is part-tenanted on a farming business tenancy (FBT) and this is due for renewal in spring 2014. The current rent level of £250 per Ha (£100 per acre) is forecast to rise to £300 per Ha (£120 per acre). Some of this rise is due to better profits in the dairy sector, but rents are also being driven up by a spill-over from competing uses, be it arable rents or letting land to grow maize for anaerobic digestion plants.

Overall, Friesian Farm profitability will be down from the budgeted highs of 2013/14, but is still good in historic terms. If these figures prove correct and are truly representative of the wider industry, then they will give the industry more confidence to invest for the future.

Friesian Farm model

LIVESTOCK NUMBERS - A SURVEY SNAPSHOT

Defra has published its results from the 2013 June Survey of agriculture and horticulture for the UK. The table below shows the key results for the livestock sectors for this year, the previous three years and for ten years ago. All sectors have seen large declines in their breeding herds and flock over the last decade.

UK June census (livestock)

The pig herd has seen the biggest fall in numbers over the decade, with the breeding herd reducing by 19.38% as herds concentrate into a fewer large specialist producers. Compared with last year's figures though, the pig breeding herd experienced a fall in numbers, down to 416,000, but total pig numbers increased by 8.2% compared to the previous year. Both sows and gilts in pig recorded a large drop in numbers by 4.1% and 5.0% respectively, meaning any recovery of breeding numbers in the short term looks unlikely. However, gilts intended for first time breeding are up by 4.3% to 85,000. The increase in total pig numbers is due mainly to fattening pig numbers. Significantly, all categories of fattening pigs continue to increase, rising by 9.4% compared to last year's levels, indicating the continued efficiency in the sector as more pigs continue to be produced by less sows. But even so a recent report by BPEX reveals the UK lags behind all of the other main pig producing countries when productivity is analysed, having the lowest number of pigs weaned per sow per year in 2012 at 22.8%. Denmark and the Netherlands continue to have the highest at 29.6% and 28.3% respectively of pigs weaned per sow per year.

The figures show the total number of cattle and calves in the UK fell by 0.6% in 2013 compared to the previous year and by 6% over the decade. The UK beef breeding herd, rather

surprisingly considering the current strong trading conditions, declined further by 2.8% to just over 1.6m head. This is an indication that some producers are 'cashing-in' on the higher prices. The beef breeding herd has reduced the least of the major livestock sectors over the last 10 years by 5.2%. But it is tight supplies which are currently holding the beef price up. The reduction in the dairy herd over the last decade has been well documented but although still reducing, the rate is getting slower particularly between 2011 and 2012 and with margins forecast to be better next year (see previous article) this could slow even further.

The sheep sector is the only major livestock sector to show a rise in breeding numbers compared to year earlier levels despite an overall 12% decline over the decade. In fact the sheep breeding flock has had two consecutive years of increases as stronger trading levels have led to improved margins in the sector and in turn an increase in confidence. UK breeding flock numbers rose by 1.5% in 2013 compared to 2012. Ewes intended for first time breeding also show a rise in numbers by 2.5% confirming the optimism in the industry. Lambs under one year are the only sheep category to record a fall in numbers reflecting the lower lamb crop in 2013 due to poor weather at tupping and lambing time.

A GROWING DEMAND FOR GRAIN - SUPPLY AND DEMAND

In 2013 the world harvested a record tonnage of just below 2 billion tonnes of combinable grains. This includes wheat, barley and maize and other grains primarily grown for livestock feed or biofuels.

This record suggests the globe is awash with grain, but simply in order to keep pace with the ever surging demands of the consumers, agricultural production needs to increase every year. Record crops are therefore required annually.

The consumption of grains (excluding rice) increases by approximately 40m tonnes each year on average. The International Grains Council (an intergovernmental grain analysis bureau) has estimated crop production will increase by 156m tonnes in 2013/14 and consumption by almost 90m. Both are higher than the trend because production was low last year leading to elevated prices. A greater increase in production means last year's decline in stocks will turn into a small surplus in 2013/14. For consumers, this is seen as a relief as stocks have been falling to worryingly low levels. Farmers are less excited as this has been driving prices down.

In many cases, particularly for wheat processors, exactly which grain stocks are available and where they are is key. For example, the wheat specification required to produce bread is different to that for biscuits and different again for livestock feed or bioethanol, whereas, with maize (the largest size crop by quite a margin), the demand is more similar. This means that the world can manage with comparatively lower maize stocks than wheat. Indeed, wheat stocks are not so low at the moment; according to the US Department of Agriculture, they will be higher at the end of 2013/14 than for five of the previous ten years. The same is true for coarse grains too despite a long term trend of falling stocks.

The chart demonstrates the long-term decline in grain stocks as a percentage of consumption and the comparatively small stock rise following 2013 harvest. This has given buyers peace of mind, they have become less concerned about procurement of grains and the market has fallen accordingly.

AN INSATIABLE DRIVE FOR FOOD - TRENDS IN FOOD DEMAND AND PRODUCTION

Agriculture is probably one of the world's oldest industries. Ever since communities became too large to scavenge for food alone, organised production of food has been necessary.

As the population has grown, this has led to gradually more and more land being farmed and in increasingly intensive ways to maximise the food from each area of land.

The global drive for more food is insatiable. As 'emerging' economies become more sophisticated, their diets are becoming more complex. The staple foods of rice, noodles (from wheat) and starchy root crops are giving way to perishable vegetables, meat and other foods. With greater access to markets and travel, the ideas and goods from further away mean staples are becoming less important. Rice consumption in China for example stopped rising per capita in the 1980s. Urban environments facilitate idea sharing, varied marketplaces and so on, exerting yet more pressure on global food supply. In 2008, half of the world's population was urban, by 2050 it is forecast to be two thirds. With urbanisation also comes more wastage. Food supply chains in large conurbations are inevitably more complex.

Agricultural production has matched the increase in demand for its commodities since the start. Technological improvements, better organisation and increased land use have all helped. We are reaching a period where, while more land is available, many people are calling for greater productivity from the same area to protect the remaining wildlife and natural environment around the world.

At the same time, there are policies being implemented in the EU designed to reduce the amount of inputs being placed on growing crops, thereby reducing productivity. Many agrochemicals are at risk of restrictions or bans in coming years, for example the Drinking Water Directive. It restricts all residues in water to concentrations equivalent to one second in 320 years. Also, the moratorium on neonicotinoid seed dressings (but not foliar sprays) on some flowering crops was implemented in December, despite the growing evidence that the seed dressings are not responsible for the decline in the bee population. Finally, the regulation to remove all endocrine disruptor chemicals regardless of the level of concentration as a safeguard to human health.

Any product that carries greater risks to human or environmental health than the benefits they offer to food security should not be used, but it appears these policies are not being based on such logic. Between them, they threaten the productivity of agriculture across the EU, whose countries are currently some of the world's most abundant food producers. Being wealthy, the EU will be able to purchase the food it cannot grow, but the poorest in society around the world are being threatened by these policies. The alternative will be the removal of the remaining rainforests elsewhere in the world.

CHEAP DEBT - A ONCE IN A LIFETIME OPPORTUNITY FOR LANDOWNERS

by Mark Ashbridge

High net worth landowners have an exceptional opportunity to drive estate growth thanks to a very unusual set of circumstances giving them preferential access to funds at very low cost. Wealthy individuals have always been able to borrow money at favourable rates. However, their competitive advantage has increased greatly since the economic downturn in 2008.

In that time we have seen a transfer of wealth across society. The richest have become richer by default, thanks to the appreciation in value of their high quality assets. This, plus the historically low Bank of England base rate, means large estates can now borrow money and effectively pay negative interest – the cost of debt is less than the inflationary level.

Conversely, many less wealthy individuals/businesses who would have been competitors before 2008 can no longer raise the level of debt needed to fund purchases. Even if they could, the cost of funds would be much more expensive, typically 6-7% or more compared with the 3% or less being offered to landed estates. This increasingly polarised market gives landed estates an opportunity that probably only appears once every few generations.

The capacity for new borrowing depends upon the level of free cash available in the existing business and the return from any new investment. Gearing on a highly commercial estate could be as high as 30-50%. On a more typical landed estate supporting a family, 5-10% might be more appropriate.

In this environment there are many opportunities available to a landed estate which offer a return on investment well in excess of cost of debt. These might be on or off estate and they might be asset purchase, development, or projects such as renewable energy.

Debt is also a hedge against inflation. We have already seen this on land – 1000 acres bought 10 years ago would have cost £4m. It is now worth twice that, so even on an interest-only loan, the gearing will have halved while the estate benefits from 100% uplift in the value of the asset.

Other benefits besides straight return on investment should be considered. Some investments might qualify for tax relief; at 45% a 3% rate effectively becomes 1.65%.

With debt this cheap, the question even for the most risk- averse estate is not can we afford to borrow, but can we afford not to?

*Ashbridge Partners is a private client finance company specialising in advising, structuring and implementing loan finance for landed and other high net worth clients. More information at www.ashbridgepartners.co.uk

SMITH & WILLIAMSON IS PROUD TO SUPPORT THE GAME & WILDLIFE CONSERVATION TRUST

The GWCT is a leading UK charity devoted to researching and developing game and wildlife management techniques, providing training and advice to farmers, gamekeepers and land managers on how best to improve the biodiversity of the countryside.

Their well-respected research has been critical in helping to restore our precious game and wildlife and their scientists have investigated the factors that are causing wildlife and habitat declines for more than 80 years. Such research also informs policy-making decisions on conservation issues in moorland, woodland, wetland, river and farming environments, making the countryside a better place for wildlife.

The Trust has been a central part of British conservation for many decades. Their Partridge Count Scheme has monitored the effect of countryside management practices on partridge density since 1933, encouraging landowners to strengthen their efforts. You may be aware of beetle banks, devised by the GWCT, which have been adopted on around 400 UK farms and provide vital food for songbirds and greatly reduce the need for summer insecticide.

Smith & Williamson proudly supported last year's CLA Game Fair, widely regarded as the world's leading country sports event and look forward to continuing to support GWCT in 2014. Smith & Williamson have a long-running association with the Trust in several ways; Jerry Barnes, one of our Bristol based partners, has been a GWCT regional chairman for some time, while Andrew Lockwood, head of landed estates in Salisbury, is also an active supporter.

Woodcock watch

Smith & Williamson are keenly supporting an initiative to learn more about the elusive wading bird.

The project is headed by Dr Andrew Hoodless, Europe's leading expert on the species, who has been using satellite tags to gain a pioneering understanding into one of our most mysterious birds. The solar powered tags, weighing just 9.5g, have so far been applied to 24 woodcock at six UK locations, travelling to breeding grounds as far afield as Latvia, Belarus and Russia. Tagged woodcock have also reached Norway, Sweden, Finland and Poland, although the star performer this year is 'Woody II', who made the astonishing 4,360 mile journey to Siberia.

Aside from monitoring the individual performance of each bird, the project has also revealed many hitherto unknown facts about the migratory patterns of this small bird. We now know that woodcock migration consists of a series of long, fast flights of 600-1,100km (375-690 miles), broken up by stops en route typically lasting between 7 to 15 days. Flight speed averages about 30 km/h (19mph), but can reach 93 km/h (58 mph). We have also learnt that woodcock can be extremely faithful to the same breeding and winter sites each year, with two birds in particular going back to the same sites year-on- year, despite the distances involved.

Smith & Williamson will also be sponsoring a woodcock shortly and will eagerly monitor its progress throughout the coming year.

If you are interested in finding out more about the work of the Game & Wildlife Trust, please visit www.gwct.org.uk. You also can track the progress of each woodcock (and even sponsor one yourself) at www.woodcockwatch.com.

STORAGE – VAT IMPLICATIONS OF LETTING THAT SURPLUS BARN

by Brigitte Potts

Since 1 October 2012, standard-rated VAT is chargeable on the letting of a fully enclosed structure for storage of goods. For instance a farmer, who lets a surplus barn to a neighbour who either uses it or lets family use it free of charge for storing goods, has to charge and account for 20% VAT on the rent. If the farmer's tenant sub-lets to a third party, then his supply is exempt (subject to the option to tax) but his tenant's supply is standard rated.

There are some exceptions

  • storage of livestock remains exempt
  • contract is between connected parties and the facility is still subject to the Capital Goods Scheme
  • let to a charity who uses it for a non-business purpose
  • freehold sales

It is up to the supplier to get the VAT liability right and so the landlord has to keep tabs on his tenant as to when he starts or stops using the premises for storage, or allows a third party to use it for storage. It would therefore be sensible to include clauses in new leases that the tenant has to notify the landlord if he starts using a facility for storage, or permits someone else to do so.

The letting of a farm on which some barns are used for storage will not be caught by this legislation as the main purpose of the letting is farming not storing.

We are grateful to Andersons, the farm business consultants, for their contribution to this bulletin. We have taken great care to ensure the accuracy of this newsletter. However, the newsletter is written in general terms and you are strongly recommended to seek specific advice before taking any action based on the information it contains. No responsibility can be taken for any loss arising from action taken or refrained from on the basis of this publication. © Smith & Williamson Holdings Limited 2014 code: 14/029 Expiry date: 30/06/2014

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