Farm Incomes in Scotland 1997/98

FARM INCOMES IN SCOTLAND 1997/98

INTRODUCTION

This booklet gives the latest financial results from a survey involving the collection of around 600 accounts representing all the main types of full time farms in Scotland. The information is collected annually on a standardised basis for the Department by the Scottish Agricultural College (SAC) who submit the individual records anonymously to the Department.

The results are used to aid administrative and policy decisions and the Department is very grateful to the participating farmers for their continued co-operation with SAC and for the detailed information they provide.

The analysis relates to an identical sample of 499 farms for which accounts were available for both 1996/97 and 1997/98, that is the 1996 and 1997 crop years respectively. However, the unavoidable spread of closing valuation dates from the Autumn of one year to the Spring of the next means that some of the 1997/98 accounts relate to the 1996/97 winter whilst others relate to that of 1997/98. The corresponding split applies to the 1996/97 accounts as well. The type classification of the farm depends on the relative importance of the various crop and livestock enterprises. A summary of the system and the farm type definitions are given in the Appendix.

In order to put all farms on the same basis for the purpose of the net farm income calculation, all farms are considered to be tenanted and therefore an appropriate rent has been charged on owner occupied holdings. Net farm income, as defined, is before the deduction of any interest payments. Machinery depreciation is calculated on current values and breeding livestock stock appreciation is excluded from net farm income in accordance with established practice.

A summary of net farm income results for 1996/97 and 1997/98 is provided in Table 1, but the following commentary relates to the detailed figures in Table 2 and also gives some indication of the forecasts for 1998/99.

SPECIALIST SHEEP (LFA)

In most areas, although ewes were generally in good condition at tupping time, early snows and wet weather in November and early-December 1996 checked their condition resulting in a reduced number of twins for the hill and upland flocks. Conditions at lambing, and therefore lamb mortality, varied widely across the country, but overall the 1997 lamb crop was considered to be slightly better than average. The availability of grass through the summer resulted in a high demand for store lambs in the south which was not readily met as producers have tended to keep more of their own lambs back, keeping prices buoyant. The net farm income fell by over 40% in 1997/98 mainly due to falls in subsidies and sheep output while the cost of inputs rose by less than 1% while feed costs fell, probably due to the high fodder stocks at the end of 1996.

It is expected that for 1998/99 net farm incomes will fall by just under 20% as increases in certain livestock subsidies are crowded out by reductions in the market element of sheep output.

SPECIALIST BEEF (LFA)

The favourable grazing conditions in the back-end of 1996 meant cows entered the winter in good condition and there was no shortage of winter keep, even though in the north spring turnout was delayed due to cool, wet weather. No severe weather problems were reported for out-wintered herds and all cattle benefited from the abundant supplies of grass throughout the summer of 1997 which resulted in stock being in good condition by the autumn. The financial performance of these farms was dominated by the continuing impact of the beef ban and the reduced subsidy payments in comparison of the BSE emergency subsidies paid in 1996. Although the cost of feed also fell, overall the cost of inputs rose. This resulted in net farm income falling by nearly 60%.

The net farm income is forecast to fall by over 45% in 1998/99 mainly due to reductions in the market element of sheep and cattle outputs. As in the LFA Specialist Sheep farm type, this is in spite of increases in certain livestock subsidies and agrimonetary compensation.

CATTLE AND SHEEP (LFA)

These farms also saw falls in their cattle output as with the LFA Beef Specialists mainly due to the fall in subsidies. However they also experienced a fall of 10.5% in their sheep output compared to LFA Specialist Sheep farms of 6%. As with the other LFA farm types the cost of inputs rose slightly even though the feed bill fell, resulting in net farm income falling by nearly 60%.

It is forecast that the net farm income will fall by 65% for 1998/89 for similar reasons as the two LFA farm types above.

LOWGROUND CATTLE AND SHEEP

It must be noted that the small sample size for this farm type means the results should be treated with caution. In the wake of the 1996 BSE difficulties finished cattle prices in the first half of this year remained flat averaging about 92p/kg which was the lowest for 16 years. A slight tightening in supplies combined with increased demand (including the return of the big burger chains to British beef) lifted prices to 99p/kg by the autumn of 1997 (up 4p on the year) with the Scottish Premium adding a further 3p/kg. Top-up payments under the BSPS and BMPS providing some cash compensation to producers helped. It is anticipated that the losses sustained in this sector will result in further expansion of arable cropping on farms, where this is feasible, and reduced purchases at the store sales despite the availability of cheap cereals. For sheep finishers, despite a sharp drop in May/early-June 1997, prices over the summer ran at a few pence per kilogram above last year’s level, but by autumn with the larger volumes of lamb coming onto the market, prices dropped. They suffered financially with the last of the 1997 lamb crop. Although cost of inputs fell by over 5%, the 15.5% drop in livestock output, brought about due to falls in sheep and milk output, meant that the net farm income for the average farm of this type went below zero for 1997/98.

It is expected that the net farm income of this farm type will fall further into the red in 1998/99 since it too will see falls in the market element of its livestock output. Also it will not benefit in the increases in HLCA, and be more adversely affected by the falls in the crop output since it is more dependent on crops than the LFA farms.

CEREALS

The autumn 1996 sowing conditions were generally good and winter cereals established and over-wintered well. Yields however suffered from the cool conditions and lack of sun in late-spring and early-summer which resulted in reduced yields. For 1997 spring crops, yields and quality were generally depressed with the rejection of barley for malting a common occurrence. For both winter and spring crops harvesting was trouble-free with little drying required but bushel weights were low. Winter oilseed crop yields were similar to 1996, but for spring crops the yield was down. Overall the arable sector has had one of its worst years for some time. Reductions in the yields of most crops have been combined with extremely low cereal prices for feed, milling and malting grain brought about by the weak global market and the strength of Sterling. The drop in the cereals and oilseed rape outputs was the main factor behind the near 100% fall in net farm income, with contributing factors being the fall in livestock output and the rise in the cost of inputs.

Net farm incomes for these farms are forecast to fall in 1998/99 to below zero mainly due to the fall in the value of the crop output.

GENERAL CROPPING

The cereal situation was similar to that experienced by the cereal specialist farms. The 1997 potato crop was generally lifted in good conditions and tubers stored well, with final yields above those of preceding years. Prices for the 1997 harvested potatoes was poor. Demand for seed was sporadic with the continued tendency to wait as late as possible before ordering. Seed was trading at £90 to £120/tonne and ware at £50 to £60/tonne but a scarcity of supplies led to a dramatic increase in the ware price to about £150/tonne in spring 1998. Although the cost of inputs actually fell for this farm type, the percentage fall in net farm incomes was similar to the specialist cereal farms except that the result was that it fell to just below zero.

This farm type is the only one expected to see an increase in its net farm income in 1998/99 and this is due to the relatively good outlook for the potato sector.

DAIRY

In 1997 turnout in the south of the country was a little early due to the warm April weather encouraging early grass growth. Further north the cooler conditions resulted in a slightly later turnout but in all areas the growth of grass through the summer kept yields at, or above, normal with less reliance on concentrates. For the past few years dairying has enjoyed a relatively prosperous financial position, but 1997/98 has seen a fall in producers prices. This fall was due to production exceeding quota combined with the strength of Sterling, reducing the value of support prices because of realignments of green rates. Most dairy companies offered considerable seasonal price incentives to encourage evenness of supply. But despite these incentives there was an overall price fall to below 20 pence per litre by the end of 1997/98 together with falls in the value of quota sales and leasing. The value of cull cows also fell under the OTMS due to reductions in price and maximum weight allowed. Calf prices were underpinned by the Calf Processing Aid Scheme which provided an outlet for the dairy bred calves and the poorer beef cross calves. The fall in the cost of inputs was insufficient to counteract the fall in outputs, especially within the milk sector resulting in a halving of the net farm income.

Due to a further fall in milk prices it is expected that Dairy farms should just break even in 1998/99.

MIXED

The physical performance of these farms are reflected in those above. Although the cost of inputs remained stable, the near 17% drop in the level of outputs resulted in net farm incomes falling by 115%. It is usually the case that with this farm type overall income remains relatively buoyant as one enterprise income goes up when another goes down. However in 199798 all livestock enterprises experienced falls in output, as did cereals.

Since the majority of the agricultural enterprises are expected to remain depressed in 1998/99, it has been forecast that the net farm income for this farm type to fall further into the red.

BALANCE SHEET DATA

The opening and closing balance sheets from the 1997/98 accounts sample are presented in Tables 6(a), 6(b) and 6(c). These show the average results by type of farm for the owner-occupied and tenanted categories and for these two categories weighted together. The owner-occupied category comprises those holdings or businesses that are wholly or mainly owner-occupied. Similarly the tenanted category comprises wholly or mainly tenanted holdings or businesses. The relatively few that are clearly neither one nor the other are excluded from this analysis. Thus the accounts sample for these tables is a sub-sample of that for which results are shown in the previous tables.

For owner-occupied farms, most farm types’ net worth fell with the exceptions being dairy and mixed farm types. This was due to all farm types experiencing increasing in their liabilities, the average of which was over 11%. Also all farm types saw their Total External Liabilities as a percentage of Total Assets either remained stable or increase by anything upto four percentage points as with the LFA Specialist Sheep. However, on average assets have also increased by nearly 2%, due to most farms having only small falls while General Cropping, Dairy and Mixed farm types experiencing large increases.

All tenanted farm types showed falls in net worth ranging from LFA Specialist Beef and Dairy farm types with less than 2% to Cereals with a fall of nearly 22%. Although half the farms showed reductions in their liabilities, all farm types, except Dairy where it has remained relatively stable, also showed reductions in their overall assets. The main factor for this seems to be the fall in the value of current assets, especially for Cereals probably due to the combination of a fall in yields and very low cereal prices.

FLOW OF FUNDS

Table 7 presents an additional income measure, discarding the assumption made in the net farm income calculation that all farms are tenanted, charging interest paid and net investment spending but not deducting depreciation on plant and machinery or other imputed costs to provide a flow of funds more directly related to farmers’ financial situation. The figures shown are for the same sample of farms as the balance sheet data, this sample being identical for the two years shown.

For owner-occupied farms, 1997/98 has for all farm types seen falls in their net farm incomes, cash incomes and cash flow from the farm business, although unlike net farm incomes, cash incomes still remained relatively high. However, due to some farm types increasing their borrowings, especially General Cropping, 1997/98 has also been a mixed year for flow of funds with some falling and others increasing.

As with owner-occupied farms, tenanted farms also exhibited falls in net farm incomes and cash incomes with the latter again remaining relatively high. Most of the farm types also saw their cash flow for farm business fall, however the LFA Specialist Sheep and General Cropping’s cash flow from farm business increased in 1997/98 due to reductions in their net investment spending..