LFA Hill Cattle Study Extension 2005

Gross margin data for LFA hill cattle farms for the 2005 calendar year.


CONCLUSIONS AND DISCUSSION

4.2 Key Points Arising from the Results Analysis

  • Weighted average gross margin for the hill suckled calf enterprise was found to be £172/cow in 2005 (£367/cow in 2004). The major factor in this decrease was the removal of the direct headage payments and the influence of HCS 12 on the weighted average.
  • Top performing farms were characterised by their ability to generate more output from their respective enterprises than their less successful counterparts, as well as their ability to control the variable costs incurred by their enterprise.
  • There was a large variation in the gross margins across the sample. The coefficient of variation increased from 33% in 2004 to 42% in 2005. This indicates that the majority of producers may be able to improve physical and financial performance.
  • Within the sample, top third hill cattle producers were characterised by having a gross margin of £292/cow, £91/cow more than the average and £188/cowmore than the bottom third of producers. They received £33/cow more subsidy than the average producer and £53/cow more subsidy than the bottom third of producers. They were able to operate with variable costs £29/cow lower than the average producer and £69/cow lower than the bottom third of producers.
  • As noted above, output was the most important factor in determining top performers. As subsidy income has reduced, technical and management efficiency has become relatively more important, as the previous direct subsidy system is no longer in place to buffer poorer performing herds.
  • Calf price only had a limited impact on gross margin. The study was only able to identify improved performance arising from better fertility and not from quality of the cattle sold. This is because the end point of the enterprise was the calf transfer out of the herd at weaning. The calf transfer price was fixed at £250/female calf and £300/male calf. It is likely that, were the quality of the stock able to be measured, there would have been a further increase in variation across the sample.
  • · The variation in total variable costs reduced considerably from 2004 to 2005 due to the absence of quota leasing charges. However this is still high in comparison to net output variation. This suggests that total variable costs can be more readily managed than net output.
  • All feed and bedding is the most significant factor and makes up 68% of total variable costs in the weighted average. The coefficient of variation is 42% for all feed and bedding, the same as in the 2004 study. This high level of variation is due to a number of factors: - silage-based diets versus straw-based diets; cattle being housed on straw over the winter versus cattle out-wintered on hill; spring calving versus autumn calving, etc. Furthermore, some participants are limited by their location, facilities or size and so may not be able to adopt certain more cost-effective systems.
  • There was little variation in SBCS payments, with the main variables being herd size (larger payments made on the first ten claims) and the number of claims made. The significance of the SBCS on the gross margin was low.
  • The LFASS payment became more significant in 2005, providing 24% of net output compared to 16% in 2004. This was due to the decrease in net output following the removal of direct headage payments averaging £236/cow.
  • The study included several farms that were based in the Northern Isles. Haulage and feed costs were expected to be high but because the breeding herd does not incur a high level of haulage or feed costs this did not materialise. Had the study included finishing animals, the differential between the island and mainland farms would probably have been more noticeable.
  • The formula for calculating replacement costs stipulated by the SSMM did not reflect changes in herd size accurately. It also returned a null value where there were no sales, deaths or transfers out or no purchases or transfers in. So in cases where breeding animals either only came on to the farm or only left the farm, a nil value for replacement cost was returned. This arose mainly for bull replacement costs. This has impacted on the accuracy associated with calculating the replacement costs for some units as well as affecting the standard deviation and coefficient of variance associated with the sample replacement costs as a whole.

4.3 Interpretation of the Study Results with Particular Regard to Future Economic Performance and Recent Structural Changes in the Sector

  • The cattle sector in 2005 was no longer heavily supported by direct headage payments. This resulted in the 2004 weighted average gross margin being £367/cow compared to £172/cow in 2005.
  • LFASS is still a major factor that contributing to gross margin in 2005. From 2006 it appears likely that this payment will become area based. This will remove a major financial incentive to keep breeding cows on LFA units.
  • The reduction in gross margin, coupled with the break in the linkage between stocking rate and subsidy income means that farmers will have to consider the optimum herd size for their enterprise going forward.
    • There are effectively dual, opposing aims: -
    • To reduce cow numbers in order to reduce costs and maximise profits.
    • To retain cows to maintain a critical mass in terms of enterprise size - i.e. one capable of justifying the infrastructure in place, labour, machinery, etc.
    • The decision as to at what level to operate is further complicated by the knowledge that income from the SFP will decrease. The status quo is therefore not an option for most producers.
    • The logical outcome is a protracted period of change over the next five years as the bottom third of producers exit the industry, with the top third of producers increasing their operations to gain economies of scale. The trend will be towards a smaller but more efficient sector, with the rate of change dictated by the strength of the UK beef market.
  • The introduction of the SFP and the proposed changes to the LFASS from 2007 will mean that producers have more flexibility in determining their future stocking rates. There is now no subsidy-driven incentive to retain additional cows. Producers will have to assess their enterprise in terms of its efficiency and cost structure in order to ensure that it is able to be profitable without subsidy. This may involve reducing cow numbers in an effort to reduce labour.
  • Throughout 2005 farmers appeared to adopt a "wait and see" approach in the absence of hard information on which to make strategic decisions such as: -
    • Size and timing of SFP receipt
    • Future levels of modulation
    • Sustainability of current beef price
    • The future of LFASS
    • Effect of the removal of OTMS
    • Effect of the removal of the export ban
  • This lack of hard information has meant that producers have been reluctant to take advantage of the SFP to assist with the restructuring of their business. As farmers now do have certainty regarding some of these issues, the question remains whether this is sufficient to allow the restructuring exercise to take place from now on.
  • Throughout the study it became clear during contact with the participants that they were finding it difficult to reach firm conclusions as to their future strategy.
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