The Economics Of Farming

I received an email on Friday (from Chris) querying why I had not mentioned words like money, profit, C.A.P. and subsidy on the website. My honest response to this was that because I am a relatively new to farming, farmer’s wife, I am yet to fully understand the economics of farming. Following this response Chris emailed me again with lots of questions that I myself have often wondered;

1) What would a farmer expect to sell the wheat from an acre of land for? 

2) How much of that would be his costs of production (i.e. seed, diesel, wages, fertilizer, capital depreciation on his machinery, rent, etc) before he calculates his profit? 

3) What is a trailer load of grain worth?

4) What is land and machinery worth to the farmer?

I showed my husband the emails I received and he was very keen to provide some information, so over to Steve @ Farming Friends:

The first thing to say is that no two farms are alike.  First of all, output (and potential profit) is relative to the size of the farm.  A farmer who grows 200 acres of wheat obviously has twice as much grain to sell as a farmer who only has 100 acres. The cost of the inputs (seed, fertiliser, pesticides etc) on the two farms will be broadly the same per acre and so the Gross Margin/acre will be similar.  The 200 acre farm may be able to buy his inputs at a slight discount as he is buying in larger volumes.  Unfortunately for the chap with 100 acres, some of his costs are fixed at the same rate as the 200 acre man eg. the accountants fees will be similar for both businesses).  Also the larger farm will be able to spread his fixed costs over the greater area so (for example) he may need a 100hp tractor to farm his land which may cost £24,000, whereas the 100 acre farmer may only need a 50hp tractor but this may cost £18,000 (which is more than half of the 200 acre farmers fixed cost for his tractor).  I guess these economies of scale are the same for any type of business.

Some farmers own their land, whereas others are tenants.  The 100 acre man could own his farm and not have any outstanding mortgage on the land.  If the 200 acre man rents his land then this rent will obviously be deducted from his profit. If a farm is on an old style agricultural tenancy then the rent may typically be £60/acre (often been owned by large estates – Lords, Earls, The Church, The Crown).  If and when these landowners are able to bring these old style tenancies to an end (eg. if the farmer has no family to carry on after him), then the land is let on a Farm Business Tenancy and a typical rent would be £110/acre.

The value of productive arable farm land has been in the region of £2,500 -£3,000 per acre over the past 10 years.  Unfortunately, the price of grain has been very low (£60 – £80 per tonne).  A tractor and trailer will contain 10 tonnes of grain.  The yield of grain per acre varies due to the soil fertility and the weather patterns for a particular season, but farmers get about 2.75 tonnes per acre of barley (range from 1 tonne to 3.5 tonnes) and about 3.6 tonnes per acre of wheat (range from 2.5 tonnes to 5 tonnes).  Lets say that the farmer averages 3 tonnes of grain/acre and sells it for £80/tonne, therefore his sales are £240/acre.  Fertiliser, pesticides and seed will cost approximately £100/acre, thereby leaving £140/acre Gross Margin. The cost of owning and operating machinery (combine harvester, tractors, trailers, fertiliser spreader, crop sprayer, plough, cultivators, fuel bowsers, grain dryers, forklifts) is about £100/acre, thus leaving £40/acre.  Over the past 12 months the price of grain has risen to about £100/tonne and so this will add another £60/acre onto this figure – so now this year we are left with about £100/acre profit.  If the farmer owns his land then £100/acre is the profit.  If the land is rented or the farmer has mortgage and interest payments then as you can see his profit will be approximately zero.  Consider that if the farmer bought his land for £3,000 per acre and borrowed £1,500 per acre from the bank then the annual interest (at 7%) will be £105/acre plus he will need to pay off the £1,500.

Then comes the subsidy.  Many changes have been made to the Common Agricultural Policy since 2005 and each farmer receives a different amount of subsidy per acre depending on what crops and livestock they have kept in previous years. The whole subsidy system is horrendously complex, but soon each arable farmer in England will receive the same payment per acre.  This will be about £70/acre.

So the farmers’ profit is about £70/acre for someone who either rents their land or has a mortgage on their land, or about £170/acre if the farmer owns his land outright.  I guess that in simple terms that many farms would be uneconomic if it were not for the subsidy payments.

You may have seen press reports over the past year or so about potential food shortages in coming years because of rising world populations, dietary changes in India and China (more meat eaten which requires more land than crop production for food) and land being used for biofuel production. (Visit PeakFood for more information about this.) This is what has driven the price of grain upwards and it is also driving the price of farmland upwards.  It is now typically selling for £3,000 – £4,000 per acre. Therefore a good sized modern commercial farm of 700 acres is worth about £2 million for the land alone, plus the value of the farmhouse.  Such a farm would require 2 people to work the land and the profit may be in the region of £70,000+.  Of course if the farm was sold and the £2million was in the bank it would earn £80,000 a year in interest at 4%.  It is probably fair to say that many farmers who own their farms are asset rich but cash poor.  The average size farm in England is about 250 acres.  Obviously the average farmer earns much less money than the farmer who owns a very large farm.

An arable farmer may typically pay £40,000 for a 160hp tractor and between £100,000 and £200,000 for a combine harvester.  This is why some smaller farms use contractors or hire their machinery.

Steve @ Farming Friends

Thanks Steve for your detailed view of the economics of modern farming.

I would also like to thank Chris for his interest in farming and taking the time to ask lots of questions about farming which stimulated much discussion in the Farming Friends household and finally resulted in this article.

If you are interested in the economics of farming or indeed any aspect of farming life then please feel free to leave a comment or fill out the contact form below.