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!”
