Farming has never been an easy way to earn a living, but there can be no doubt that the profitability of most farm businesses is at a low point. The war in Iran is just the latest geo-political event to deliver a blow, and unlike the beginning of the Ukrainian War, this time around the explosion in input costs – especially diesel and fertiliser – has not been accompanied by a spike in output prices.
Alongside this, another tough weather year is once again resulting in the prospect of low crop yields, just as margins are being squeezed dramatically.
All of this has come at a time when the inheritance tax issue is concentrating minds about profitability. Even with the increased threshold announced by Rachel Reeves in December, many agricultural businesses are facing the prospect of having to find IHT payments for a period of ten years, from farm profits. When there is barely enough to live on in the first place, this will be a stretch for many.
Inevitably, then, talk is once again of finding new income streams through diversification. The problem is that this presents the danger of increasing the value of farms assets for IHT purposes: convert an agricultural building which qualifies for IHT relief into a holiday let or a business unit, and not only do you increase its value, but you lose that 50% relief as well.
Never before has there been a greater need for farms to think like businesses, and in particular to review margins, budgets, how assets are maximised, and how they can be developed to deliver new income streams. In short, all farm businesses should have a robust business plan; the days of ‘we’ll do what we did last year and it will be OK’ are gone, probably forever.
Notwithstanding that none of us can predict weather events, disease or geo-political upheavals, agricultural businesses need to start planning on a more long-term basis, especially those which currently rely on producing and selling primary produce such as grain. This type of business will always be a price-taker, with no control over the income it receives for its output.
One potential solution to this is to diversify vertically, developing new products which add value and enable the business to be a price-maker. Such an approach may also require developing a strong brand which sets the business’s offer apart, and which can command a premium price.
Few farmers want to enter the business ‘rat race’. But the fact is that farms are businesses just like any other, and if they fail to develop robust business plans, many will be heading for decline.