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Section B
Agricultural and Farm Classification and the Farm Accounts Survey

Why are farms classified?

Farms are classified into groups according to type and size to allow analysis of the sector.
The Farm Accounts Survey ( FAS) uses UK farm classification typology to group together similar farms to allow comparisons between results for different groups of farms. The UK farm classification system is designed so that the farms in the same group are as similar as possible and farms in different groups are as different as possible. Because it is not practical to examine each farm individually it would be impossible to carry out meaningful analysis of questions like the following without classification:

• Is the number of small farms shrinking?
• How many sheep farms are there in Scotland?
• How will small cattle farms be affected by new government policy?
• Are large farms more profitable?
• How diversified are cereal farms?

Results of the FAS presented using the UK farm classification system are published each year in Farm Incomes in Scotland. The other primary user of the UK farm classification system is the June Agricultural and Horticultural Census.

How does the UK farm classification system work?

Two different kinds of classification need to be considered.

A. Classification of Agricultural Businesses by Type

B. Classification of Agricultural Businesses by Size

A. Classification of Agricultural Businesses by Type

Classification of Agricultural Businesses by type is a relatively simple process when only one agricultural enterprise type is present on a farm. However, when more than one enterprise type is present (for example both pigs and poultry), a system is needed for deciding how to classify the resulting Agricultural Business.

This means that a system is needed for weighting the relative contributions of different crop or livestock types to the Agricultural Business as a whole. The UK system is based on weighting contributions by the profit associated with them. Standard Gross Margins ( SGMs) are calculated per hectare of crops and per head of livestock and used to calculate the standard profit associated with each part of the Agricultural Business.

What are SGMs and how are they calculated?

Information on individual margins for each farm is not available, so standard figures for different livestock and crop types are used. SGMs are representative of the level of profit that could be expected on the average farm under "normal" conditions (i.e. no disease outbreaks or adverse weather). Different SGMs are calculated for Scotland, North England, East England, West England, Wales, and Northern Ireland to allow for the differences in profit in different areas.

SGMs reflect the "gross margin" expected, which means that they reflect the value of output minus the variable costs directly associated with producing that output. Variable costs are costs that vary in approximately direct proportion to the scale of production, for example seed, fertiliser and feed.

Until 2004, the SGMs used in the FAS for classification were based on a three-year average centred on 1988. The SGMs now in use are based on a five-year average centred on 2000. SGMs are based on a five-year average in order to lessen the impact of yearly fluctuations on calculated SGMs.

The 2000 SGMs for Scotland can be seen in Annex 3.

How are Agricultural Businesses classified into different types?

Farm classification is based on the relative importance of the various crop and livestock enterprises on each farm assessed in terms of standard gross margin. The method of classifying each farm is to multiply the area of each crop (other than forage) and the average number of each category of livestock by the appropriate standard gross margin, the proportions of the total contributed by the various enterprises determining the type of farm. The list below defines the main types that are used when presenting the results of the FAS1.

1. Changes were made to the classification system in 2004, the key ones for the FAS being the extension of cattle and sheep types to include other grazing livestock (including goats and deer).

For Example:

The UK classification system for Agricultural Business Types is closely related to the Eurostat method used at EU-level, but there is a slightly different list of farm types to reflect UK agriculture, and a slightly different set of calculated SGMs is used.

B. Classification of Agricultural Businesses by Size

For the purpose of classifying Agricultural Businesses according to size, a different system of combining different enterprise types is used. Enterprise types are added together according to how much labour they use. This means that Agricultural Business is classified according to whether they are, e.g. a one-person Agricultural Business or a three-person Agricultural Business. Standard Labour Requirements ( SLRs) are calculated for different livestock and crop types, and used to find the total amount of standard labour used on the farm.

What are SLR coefficients and how are they calculated?

Information on individual labour usage by enterprise on each farm is not always available and could vary across farms, for example depending on the extent to which the farmer chose to substitute machinery for labour. Standard figures for the labour requirements associated with different livestock and crop types are therefore used, on an hours per-head or per-hectare basis. SLR coefficients are representative of labour requirements under typical conditions for enterprises of average size and performance. SLR coefficients are generally standard across the UK, but are 50% higher for field enterprises in Northern Ireland to reflect smaller field size.

The SLR coefficients for different enterprise types can be seen in Annex 3.

How are Agricultural Businesses classified into different sizes?

Once the total annual SLR figure for an Agricultural Business has been calculated (by multiplying the numbers of different livestock or numbers of hectares of different crops by the relevant SLR coefficients and then adding the results together), the number of hours can be converted to an equivalent number of full-time workers (on the basis that a full-time worker works a 39 hour week and so 1900 hours a year).

This leads to the classification of farms by number of full-time equivalent ( FTE) workers as follows:

The Very Small category is further classified into Spare Time Agricultural Businesses (<0.5 FTE) and Part Time Agricultural Businesses (0.5 to <1 FTE). All the larger classifications represent various sizes of Full Time Agricultural Businesses.

The UK system for classifying Agricultural Businesses by size using SLRs provides a more intuitive description of farm size, particularly the difference between Full and Part Time Agricultural Businesses, than the Eurostat system, which uses a method based on SGMs.

Annex 3: 2000 SGMs and SLR coefficients for Scotland (figures in £ for SGMs and hours per unit of production for SLR coefficients)

Introduction

Net Farm Income ( NFI) estimates are produced annually from the Farm Accounts data with the principal aim of providing information on the trends across years. Results are presented for those farms that have provided information for both of the two most recent crop years to enable a more accurate comparison of the year-to-year changes (as the trends will not be affected by variations in the sample).

Table B1 shows the outputs, inputs and NFI for 2002/03 and 2003/04 for each farm type. The proportion of farms in different NFI ranges is given in Table B11(a). Table B2 shows the average figures for tenant's capital. The following commentary relates to the detailed figures in Table B1 and also gives some explanation of the forecasts for 2004/05.

All types

Overall, 2003/04 was a more favourable year for farms than 2002/03, with NFI increasing by about 90%. Generally most farm types saw incomes grow, but the average, all-types estimate hides some variation in performance between differing individual farm types. NFI for cereals, general cropping and mixed farms rose particularly strongly, but this was from a very low base in 2002/03 following the low prices and indifferent yields that year. LFA livestock farms saw more modest gains with a continued recovery in the wake of Foot and Mouth Disease. The Dairy sector posted a large gain from a historically low base on the back of a small increase in milk price.

The NFI forecast for 2004/05 is made on the basis of information about price, output (yield, area and stock numbers) and subsidy change over the forecast year as compared to the previous year. Data are taken from a range of sources e.g. SEERAD commodity surveys, the Home Grown Cereals Authority, and the Department of the Environment, Food & Rural Affairs.

The forecast suggests a decline in NFI for average Scottish farm incomes of around 47% compared to 2003/04 mainly as a result of lower cereals prices.

Specialist Sheep ( LFA)

Incomes for this farm type continued to improve following the lows experienced during foot and mouth disease. Both cattle and sheep outputs showed increases of 17% and 10% respectively, with total outputs up by about 9%. Input costs were generally up on the previous year by around 9%. The absolute rise in output value was however greater than that for inputs leading to an increase in NFI of about 12%.

2004/05 is forecast to see incomes fall by about 34% to £6,600 mainly as a result of higher input prices (as oil prices have increased) as opposed to any particular fall in output values; cattle and sheep outputs are forecast to be at broadly similar levels to 2003/04.

Specialist Beef ( LFA)

Total output in 2003/04 fell very slightly compared to the previous year. Both cattle and sheep outputs were up slightly on the previous year but were more than offset with falls in the value of LFASS payments and contract work in particular. On the input side, large rises in expenditures on building repairs and crop protection were more than offset by declining expenditures on other inputs with overall input costs down 1% on the previous year. The decline in input outstripped the fall in output values thus leading to a small rise in NFI in 2003/04 to £20,900, compared to £20,700 in 2003/04.

2004/05 is forecast to see a fall in NFI for this farm type. Beef and sheep outputs are expected to be more or less at the same levels as in 2003/04 but input costs are expected to increase by about 4%, leading to a forecast income of £16,900.

Cattle and Sheep ( LFA)

LFA Mixed Cattle and Sheep farms saw a modest increase in farm incomes in 2003/04 compared to the previous year. Both cattle and sheep outputs increased by about 7% which, combined with rises in the value of other outputs meant that overall output at the farm level increased by around 9%. Input costs increased only slightly by 2%, with the rise being spread evenly across the various expenditure categories. Consequently, most of the rise in output value fed directly through to increasing NFI, with incomes rising from £14,000 in 2002/03 to £20,900 in 2003/04.

As for the other LFA livestock farm types, the expectation for 2004/05 is for a fall in NFI from £18,500 in 2003/04 to £16,900, with a small rise in total output being forecast to be offset by a modest (5%) increase in input costs in NFI, reflecting the continued rise in sheep and cattle prices following FMD and the increased cereal prices and yields.

Cereals

NFI for cereals farms recovered strongly in 2003/04 following the lows the previous year. Incomes rose to £17,300 compared to negative £500 the previous year. Output value rose strongly as a consequence of a good harvest and robust cereals prices. However, the rise was tempered somewhat by an 11% increase in overall input costs with crop expenses, fertilisers and labour costs all showing significant increases.

Incomes in this sector are, however, forecast to fall substantially in 2004/05 to negative £4,200. This is expected entirely as a result of lower cereals prices and indifferent harvest in 2004, with overall outputs being forecast to be down by 12%. The incomes position is further compounded by input prices being forecast to increase by 5% mainly as a consequence of higher oil prices.

General Cropping

As in the case of the cereals farm type, general cropping farms saw an increase in their incomes from negative £1,400 in 2002/03 to £27,600 in 2003/04. This was mainly due to an 18% increase in crop output, with good results posted for both cereals and potatoes. Input costs were more or less unchanged on the previous year, with substantial increases in seed and livestock expenses being offset by falls in others such as contract costs and crop protection.

NFI is forecast to fall significantly due to lower cereals prices, with overall output values being forecast to be down by 11%. After an anticipated 5% rise in input costs is taken into consideration, overall NFI for this farm type is expected to fall to negative £600 in 2004/05.

Dairy

The average NFI for dairy farms increased quite sharply from £8,800 in 2002/03 to £23,500 in 2003/04. Milk output was up 6% as a consequence of slightly better milk prices on average in 2003/04 compared to the previous year. The value of crops grown on farm also increased by 11% with better cereals yields and prices. Input costs fell by nearly 3% with increases in seeds and crop expenses being more than offset by a fall in other input expenditures such as feed, building repairs and labour.

Incomes in the sector are forecast to continue to rise albeit at a more modest rate in 2004/05. The main drivers of the increase are expected to be the continued (but marginal) recovery in milk price but mostly because of the introduction of payments under the dairy premium scheme. Input costs are forecast to rise by about 4% meaning that NFI is expected to be £25,100 for this farm type, or up by about 7%.

Mixed

In 2003/04, mixed farms experienced a rise in NFI from £9,200 the previous year to £20,300. This resulted mainly from increased cereals, cattle and sheep outputs. Input expenditures increased by 3% with seed and crop protection rising quite strongly. Nevertheless the rise in output value was sufficient to lift NFI by over 100%. Performance in this sector in 2004/05 is expected to reflect that of the cereals and livestock sector described above with NFI forecast to be down by 53% to £9,600. Falling crop outputs combined with an increase in input costs are the main drivers of this change.

Lowground Cattle and Sheep

Results for this farm type in 2003/04 show that NFI was down slightly on the previous year from £19,400 to £18,500. Overall output value was down by 2% and input expenditures were also lower by about 1% compared to 2002/03. It should be noted that results for this farm type are not usually recorded as a consequence of the small sample size. By presenting the results based on the full sample rather than the identical sample however has allowed publication of results for this farm type. Having said that, the results are based on a sample of only 9 farms and those may not be typical.

Incomes for this farm type are forecast to be down by 8% in 2004/05 compared to 2003/04, from £18,500 to £16,900. A small rise in output is expected to be more than offset by a (modest) increase in input costs.

Table B11 (a) shows the variation in NFI between farms in 2003/04. Around 16% of all farms in the sample (and around 0% to 50% when examined by farm type) had a negative NFI in 2003/04. As in previous years, there were a greater proportion of large farms than medium and of medium farms than small, in the highest income ranges. Smaller farms are more likely to have negative income than larger farms.

Distribution of farms by Net Farm Income, Net Profit and Cash Income

Tables B11 (b) and B11(c) show the variation in net profit and cash income between farms in 2003/04 respectively. About 6% of farms had a negative net profit in 2003/04, and 4% had a negative cash income. As with NFI, there were a greater proportion of large farms than medium and of medium farms than small in the highest net profit and cash income ranges.

Tenant's Capital

Table B2 shows the value of capital investment by farmers as tenants for 2003/04. Machinery is shown at depreciated current values. It should be noted that while breeding livestock stock appreciation has been omitted from net farm income it has been included in the calculation of average capital and therefore the two sets of figures are not on the same basis.

On average for all farm types, total investment was up on 2002/03 levels for small, medium and large farms. The value of all types of capital increased on average.

Balance sheet and flow of funds data

In previous years, all farm businesses that were not clearly either wholly or mainly owner-occupied or wholly or mainly tenanted were excluded from balance sheet data and from measures such as cash income, cash flow and flow of funds. In addition, all farms with untypical balance sheet data were also excluded. The combined effect of this was that around a quarter of the farms in the FAS were excluded from these tables.

Balance Sheet Data

The opening and closing balance sheets from the 2003/04 accounts sample are presented in Tables B3 to B6. These show the average results by type of farm for the owner-occupied, tenanted and mixed tenure categories and for all tenures.

There was a small increase in value of total assets of owner-occupied farms of about 3% during 2003/04. All farm types saw an increase in the value of total assets. Dairy farms saw the highest percentage increase of about 15% and cereals the lowest of about 1% compared to the previous year. Closing liabilities values were generally at similar levels compared to the previous year for all farm types on average. Changes in net worth reflected these changes in asset and liability levels, with a 4% increase for the all-type average. The largest increase was for dairy farms of around 15%. Total net worth fell marginally for the cereals farm type and LFA cattle and sheep. Total external liabilities as a percentage of total assets were at similar levels compared to the previous year, at 14% across all farm types. The percentage was lowest for LFA Sheep and Cereals (9%) and highest for LFA Cattle and Sheep (23%).

The total assets of tenanted farms were up overall, by about 2%. However, this masked a generally mixed performance with large rises in asset values being experienced by diary farms (up 16%) and LFA specialist beef being down by about 3%. Total liabilities decreased on average across all farm types over the year by 9%, and net worth rose by around 5%. Total external liabilities as a percentage of total assets fell on average, to around 18% (and were lowest for LFA sheep farms at 14% and highest for dairy at 30%). Mixed tenure farms saw a small rise in net worth on average; the diverse nature of this group must be borne in mind in interpreting the figures, as it includes farms with a variety of tenure arrangements.

Cash Income, Flow of Funds and Net Profit

Tables B7 to B10 give an analysis of the flow of funds and net profit for farm businesses by tenure and type. In this income measure the assumption that all farms are tenanted that is made in the net farm income calculation is discarded, and interest paid and net investment spending are charged but depreciation on plant or machinery, and other imputed costs are not deducted. This provides a flow of funds more directly related to farmers' financial situation.

The average cash income of owner-occupied farms increased by 16% in 2003/04. Cereals and general cropping farms increased most strongly with rises of 41% and 36%. The Livestock specialist farm types saw their cash income remain at broadly similar levels to the previous year. Generally the flow of funds rose too. Net profit for this group of farms rose, reflecting the rise in NFI.

For tenanted farms, generally cash income was up on levels from the previous year although the experience between farm types was mixed. General cropping, cereals and dairy farms showed strong increases with mixed and specialist sheep farms showing a fall. The flow of funds on average remained at levels seen the previous year. Again the change in net profit, generally, is reflected by the rise in NFI.

Overall, across all farm types and tenures, average cash income rose, following the trend in NFI, and the flow of funds rose slightly linked to the higher levels of net cash from non-farming activities and a small decrease in the level of borrowing from 2002/03.

Net Farm Income, Output and Input Performance by Quartile

Tables B12(a) through to B12(d) show output and input values by farm type categorised by lower quartile, upper quartile and all farms performance bands. The tables have been included to show output, inputs, NFI and cash income vary according to whether a farm is in the highest or lowest performing 25% of the farm accounts survey sample.

Interpretation of the figures is not given in this text for all farm types. However, by way of an example, for specialist cereals type farms, it can be seen that the better performing businesses are larger in size and have a greater proportion of their total output from cereals activity (69% versus 58% for the lower quartile). Similarly, with regard to total inputs it can be seen that for the better performing group of farms, total input cost is 76% of total output, compared to 87% for the all sample average and 105% for the lower 25% group.

Put another way, the top performing farms by NFI for the specialist cereals farm type produce £1.32 of output compared to £1.15 for the all sample average and £0.95 for the lower performing farms, with the implication that better performance in relation to NFI is associated with being more market orientated businesses.

The individual output and input value categories may also be used to benchmark individual farm businesses to the better and lower performing categories by farm type. Further benchmarking data using farm accounts data is available at www.farmbusinessbenchmark.defra.gov.uk .

Non-farming Income

This section presents information on the non-farming activities and incomes of farmers and spouses participating in the Farm Accounts Survey. Over 90% of participants provided information on whether the farmer and spouse had other sources of income, either from non-farming activities on the farm or from off-farm activities. Participants were asked to indicate into which of ten incomes ranges the joint non-farming income of the farmer and spouse fell for each of seven separate sources of income. Note that the non-farming income information is recorded in income ranges rather than as absolute values, so group averages will be less reliable than for other figures presented in this publication, and there is an unusually high degree of rounding error when comparing total non-farming income with its constituent parts.

Table B13 indicates the approximate levels of income from non-farming activities according to farm type and farm size. For all farms, the non-farming income of the farmer and spouse, both on and off the farm, averaged over £11,000, which is 18% up on the previous year. Around half of this was earned from employment and self-employment, with nearly as much coming from investments, pensions and social security payments too. The remainder was from on-farm activities that use farm resources, such as small-scale bed and breakfast businesses. Such activities contributed a modest but increasing percentage of total non-farm income (about 20%) compared to the off-farm sources. Cereal farms had the highest non-farming income in 2003/04 and dairy farms the least.

Table B14 shows the distribution of this non-farming income by farm type and farm size. As one would expect, there is considerable variation between farms, with 15% of all farms having no income other than from farming, and a similar proportion having non-farming income of £20,000 or more. The modal ranges were £10,000-20,000, which had 25% of the sample.

Introduction

The NFI estimates are produced from an analysis that relates to two samples of farms of 478 for 2002/03 and 444 for 2003/04, representing full-time farms of all of the main types in Scotland (excluding horticulture, specialist pigs and poultry farms). It should be noted that this is different to previous years when the results for the two years were presented on the basis of an identical sample of farms in each year. This change improves the statistical robustness of the estimates and follows advice from the Office for National Statistics.

Changes to the farm Classification system from 2003/04

A UK farm Classification working party was convened in December 2001 to review the 1994 classification system used by the UK rural affairs departments. The working party had four objectives:

• To review the United Kingdom's Farm Classification System
• To devise a transparent system which assists stakeholders in understanding the structure of farming and its role in the rural economy
• To recommend how such a system should be implemented and
• To influence the development of the EU farm typology system.

The recommendations of the working party have an impact on reporting Net Farm Incomes in Scotland in terms of farm type (classification), which is dependent on Standard Gross Margins ( SGMs) and on the measurement of farm size which has been in European Size Units ( ESUs). The 2003/04 farm accounts year are measured in Standard Labour Requirements ( SLRs).

Changes resulting from the updating of Standard Gross Margins

In moving from 1988 centred three year Standard Gross Margins ( SGMs) to a 2000 centred five year average SGMs, it is intended that the new SGM
co-efficients will be updated every five years.

The Time Period covered by the Survey

The survey is not carried out on a calendar-year basis but based on farms' financial years. The exact period covered by the survey for any given year will vary across the sample depending on individual businesses' accounting year ends, although they all centre on the same cropping period (see diagram in Annex 1). For example, the 2003/04 accounts all centre on the 2003 production and subsidy year. The spread of closing valuation dates from the autumn of one year to the spring of the next means that (unavoidably) some of the 2003/04 accounts relate to the 2002/03 winter whilst others relate to that of 2003/04 (and the corresponding split applies to the 2002/03 accounts as well).

The main income measure reported is Net Farm Income ( NFI). NFI is defined as the returns to the farmer and spouse for their manual and managerial labour, and for the tenant-type assets invested by them in the business (see flow-chart in Annex 2). It is before the deduction of any interest payments. All farms are assumed to be tenanted in order to put them on the same basis when assessing their performance, and so an appropriate rent has been imputed and charged on owner occupied holdings. The principal advantage of NFI as an indicator is that it can be compared across all farms as it takes account of the different tenure, labour supply and finance arrangements of different farms. Machinery depreciation is calculated on current values and breeding livestock stock appreciation is excluded from net farm income in accordance with established practice. NFI is a narrower income measure than the aggregate-level TIFF, and as a consequence the annual percentage change in NFI is more volatile, especially at relatively low levels of income.

NFI is a very different concept to Net Profit, which is a measure commonly used by farm businesses for management purposes. Farm profit (or loss) equals the total farm gross margin minus fixed costs (where farm gross margin = total output - total variable inputs). NFI can be reconciled to net profit by:

- Adding back imputed labour for family and partners, rental value, imputed rent on improvements and ownership income.

- Deducting interest payments, depreciation on tenant's improvements and ownership expenses.

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