1. EXECUTIVE SUMMARY
The purpose of this study was to establish gross margin data for LFA hill cattle farms for the 2005 calendar year. The study followed on from the 2004 LFA Hill Cattle & Sheep Study and aims to provide information on the relative profitability of the LFA hill cattle sector post CAP Reform. The data gathered from the 19 suckler herds in the sample, will provide the basis for technical and economic analysis of the results from a historic and comparative perspective.
1.2 BACKGROUND TO THE STUDY
The period under study, 2005, was the first year of the Single Farm Payment Scheme ( SFPS), introduced as a result of the reform of the CAP from 1st January 2005. The major thrust of the CAP Reform has been to decouple support payments from production across the main agricultural sectors within the EU.
The beef sector in Scotland has particular importance, providing £463m of output (27% of agricultural output) in 2005 ( ERSA 2006). Although this figure is not split between LFA & non- LFA farms, some 83% of all beef breeding cows in Scotland (497,744 head in total) are within the LFA area, along with 59% of all prime cattle (454,899 head) ( ERSA 2006). Suckled beef production is therefore crucial to the current mix of farming in the upland ( LFA) areas of Scotland.
A number of commentators have estimated that suckler cow numbers could fall by up to 30% post CAP Reform due to the switch to decoupled payments. This study provides an initial indication of the profitability of hill cattle farming in the light of CAP Reform.
In 2005, the beef sector showed an improvement in prices for the first half of the year, at which point prices fell rapidly due to increased supply of domestic and imported beef.
1.3 PREPARATION OF RESULTS
The units in the study were made up of 16 combined hill cattle and sheep enterprises and 3 purely beef units. A weighted average gross margin has been produced together with league tables of performance and a comparison with the 2004 results. It is important to note that the Single Farm Payment has not been included in the 2005 gross margin due to its decoupled nature. This means that the subsidy allocated to hill suckler cows in 2005 is much lower compared to 2004.
Weighted Average Gross Margin
for the hill suckler cow enterprise was found to be
£172/cow compared with £367/cow in 2004
1.4 KEY CONCLUSIONS
- Weighted average gross margin reduced by £195/cow between 2004 and 2005, almost exactly the amount of direct headage subsidy received in 2004. It is therefore obvious that much of the fall in gross margin is a result of the shift from direct production support to the Single Farm Payment Scheme.
- Output remains the most important factor in determining top performers.
- As a result of the reduction in subsidy income, technical and management efficiency of the suckler cow enterprises has become more important in determining gross margin performance.
- The LFASS payment is an important contribution to gross margin and continues to vary considerably between participants on a per cow basis. The potential move to area based LFASS payments will further reduce the need to maintain cow numbers.
- Despite the reduction in gross margin of some £195/cow, the level of variation within the sample remained close to 2004, demonstrating that the majority of the variation is due to characteristics of the individual business.
- Total variable costs also showed a wide range in performance although the coefficient of variation did reduce from 60% to 38%. This was due to the absence of quota leasing costs in 2005, which were present on two farms in 2004.
- There has not been the structural change in the sector that was anticipated by many commentators. This can be explained by the lack of detailed information that individuals had access to on which to base forward planning. Examples of this information are size of the Single Farm Payment and the effect of the end of the OTMS, etc.