Rising labour costs, soaring energy bills, record fertiliser prices, increasing interest rates, and the effects of the war in Ukraine are all combining to place unprecedented strain on farming cashflows and margins, says Chris Solt.
Although many of these factors are beyond the control of individual farmers, it is more important than ever to take steps to mitigate this explosion in costs, says Mr Solt.
“One thing to do is to ensure your assets are working as productively as they can,” he advised. “If they are not, or they are surplus to requirements, now might be a good time to divest yourselves of them. With the price and availability of new equipment being squeezed, the market for second-hand equipment is vibrant, so it’s a good time to sell assets which you are not fully utilising. But be mindful that the proceeds from these sales could give rise to an unexpected tax charge.
“Conversely, despite rising interest rates, it could be an efficient time to invest in assets which will make your business more efficient and reduce your reliance on ever-more expensive labour. The ‘Super Deduction’ announced in last year’s Budget means that 130% tax relief is available on investment in new equipment until March 2023, and the amount is unlimited.
“The main caveat is that the business has to be a limited company, so now might be a time to review the structure of your business to see if incorporating to take advantage of an extremely generous tax break might be a good idea.”
Mr Solt said that it is more important than ever to maximise output prices. “Cereal prices are currently at record levels, and this will mitigate against rising input costs for now; but the inevitable peaks and troughs in prices will have greater consequences in the near future as costs continue to rise.
“If you were lucky enough to buy inputs early at a ‘reasonable’ level and you still have some left, will it generate sufficient additional yield to warrant application or would it be better to carry forward for next year?”
Mr Solt also advised looking at diversification activities with lower levels of inputs such as holiday lets or business units, or considering taking on contracting work for other farms, getting paid for doing the work, but not having to carry the costs of, for example, fertiliser.
He also suggested reviewing how the farm business could innovate. “It’s time to review cropping policy, consider other uses for the land such as carbon capture, creating woodland, and so on. Not only could this potentially reduce costs but, it would also open up funding streams which may not currently be available – especially for smaller farms.
“One thing is certain: the upwards pressure on costs is not going to disappear anytime soon. A combination of where we are in the economic cycle, the financial hangover of two years of pandemic-related spending, and the dark shadow of conflict in Europe will all come together to keep inflationary pressure high. The old adage of control the controllables has never been more relevant; however, finding things you can control is becoming more difficult!”