Scottish Government

Economic Report on Scottish Agriculture 2003 Edition

Section B
Financial results by type of farm 2000/01 - 2001/02

Introduction

The information is collected annually for the Environment & Rural Affairs Department by the Scottish Agricultural College (SAC) and individual records are submitted 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 that they provide.

Up to 500 farm accounts are collected annually from a sample of businesses representing the main farm types in Scotland. The sample covers full-time farms only, and excludes horticulture and specialist pigs and poultry farms. The farm type classification depends on the relative importance of the various crop and livestock enterprises. The size classification relates to the economic size of the business based on its total standard gross margin. Means are weighted by type and size, and also tenure for balance-sheet tables, using data from the June Census on the population of Scottish farms.

The analysis presented here for the 2001/2 survey relates to a two-year identical sample of 386 farms, which were not directly affected by FMD culls and compensation, out of a survey of 435. Of the 435 farms 49 were subject to compulsory FMD culls (and compensation) and/or welfare culling ¹. The subset of 386 farms was drawn to avoid biasing the results for 'typical' Scottish farm businesses by including the results for those businesses in atypical circumstances due to FMD. Delays to fieldwork caused by FMD in both 2001 and 2002 (due to on-going restrictions and related recruitment/retention problems) resulted in slightly smaller sample sizes than in previous years (typically just under 500). However, the sample still contains a sufficiently large number of farm accounts, in an appropriate size, type and tenure stratification, to give a representative picture of full-time Scottish farm businesses.

The Time Period Covered by the Survey

Income estimates are produced from FAS data with the principal aim of providing information on the trends in farming incomes across years. Results are presented based on those farms which have provided information for both of the two most recent crop years (i.e., using an identical sample for the two years, which are known as the 'base' year (2000/1) and the 'current' year (2001/2)). This enables a more accurate comparison of the year-to-year changes as the trends will not be affected by variations in the sample.

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 2001/2 accounts all centre on the 2001 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 2001/2 accounts relate to the 2000/1 winter whilst others relate to that of 2001/2 (and the corresponding split applies to the 2000/1 accounts as well).

Given the timing of the outbreak, the 2000/1 accounts were unaffected by FMD, as culling took place almost entirely after farms had closed their books. All immediate impacts were captured therefore in the 2001/2 accounts.

Measures of Income

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; and Deducting interest payments, depreciation on tenant's improvements and ownership expenses. Another way of looking at NFI is Management and Investment Income (MII) plus farmer and spouse labour costs minus paid management, where MII is equal to farm gross margin minus total fixed costs (farm profit or loss).

Summary of the 2001/02 FAS results and NFI forecasts

The vast majority of farms did not receive FMD compensation. Hence, estimates of Net Farm and Cash Income from the 2001/02 FAS are based on the 90% of FAS farms NOT affected directly by FMD-related culling and compensation. This avoids presenting a distorted picture and trend analysis of incomes for "typical" farms.

The trend in mean NFI has been upwards once more, except for arable and sheep farms. The mean NFI across all farm types was around 10,000 in 2001/2, compared to 6,000 in 2000/1. Dairy farms have seen the most pronounced rise since 2000/1. Mean Cash Incomes have also shown an upward trend in general, with a mean of around 30,000 in 2001/2. NB Cash income figures are highly dependent on whether or not rent is paid (as well as the source of labour - i.e., hired or farm family's own) and so should really be interpreted in the context of information on tenure (NB statistically robust analysis for farm types by tenure groupings is constrained by sample size).

2001 was an exceptional year for all concerned in the livestock industry. For most of Scotland, movements of animals for slaughter were prevented from 23 February to 4 March 2001. After 4th March a Licence to Slaughter Scheme was introduced that allowed controlled movements of store animals to slaughter. It was not until late April that movement of stores was allowed in specific regions and not until late August when the auction market systems restarted in those areas of Scotland least affected by FMD. By the close of the year, most marketing channels were open again throughout Scotland, though the licensing of movements and bio-security measures remained in place.

FMD had the net impact of reducing the number of beef animals reaching Scottish abattoirs, leading to price increases. For the year after the first 6 weeks, Scottish clean cattle prices were typically some 5-10% higher than the levels a year earlier. Clean heifer prices rose by more than steer and young bull prices as a consequence of reduced availability as producers affected by culls considered their re-stocking options. By the autumn, as store sales became more numerous, the indications were that prices were 25-30% higher for steers and 30-40% higher for heifers. NB The Scottish situation was in contrast to the overall GB situation, where 2001 clean cattle prices did not overtake 2000 prices until late autumn. Constraints on livestock movements led to increased variable costs, particularly feed and vet costs. However, support payments to typical beef producers increased significantly in 2001, following the phasing-in of measures announced under the Agenda 2000 CAP reform and agri-money payments. Hence, in those regions most heavily affected by FMD, producers who did not lose stock but who faced the most prolonged restrictions on livestock movements would not necessarily see much change in their profitability for 2001/2 if higher sale prices and subsidies balanced higher costs.

2001 was a particularly poor year for the sheep sector, for which the impacts of FMD were greater than any other sector. The principal cause of problems was the loss of export markets as well as the restrictions on marketing stock introduced in the wake of FMD. Immediately following the start of the FMD outbreak lamb prices fell well below year-earlier prices, although they saw some improvement over the summer as supplies tightened before falling again in the autumn. Export markets were re-opened at the end of 2001 allowing a price response for stores (rising to around 5% above year-earlier levels). Breeding prices were above year-earlier levels; probably reflecting reduced supply for re-stocking farms.

The milk sector started the year with high prices compared to the previous year, but optimism was short-lived as prices fell towards the spring and remained low. Despite FMD, production continued at higher than expected levels in autumn 2001 (shortages had been anticipated given disrupted calving patterns). Dairy farms have maintained their high level of performance with higher output more than balancing any FMD-related consequential losses due to bio-security costs or higher feed costs from livestock movement restrictions.

Table A: Mean Net Farm Income, by farm type, for farms NOT in receipt of FMD-related Compensation, Scotland 2001/02

	NFI in 2000/1 Sample size	NFI in 2001/2		% change
Cereals	25	4,003	-576	-
General cropping	47	5,104	7,971	56.2
Dairy	52	13,897	33,090	138.1
LFA specialist sheep	47	2,880	1,230	-57.3
LFA specialist beef	88	6,617	13,790	108.4
LFA cattle & sheep	67	6,000	10,274	71.2
Lowland cattle & sheep	8	1,925	11,123	477.8
Mixed	52	6,643	12,638	90.2
All	386	6,076	10,438	71.8

(a) Percentage changes not given where income negative

Table B: Mean Cash Income, by farm type, for farms NOT in receipt of FMD-related Compensation, Scotland 2001/02

	Sample size	Cash Income in 2000/1	Cash Income in 2001/2	% change
Cereals	25	33,167	15,305	-54
General cropping	47	46,005	44,210	-4
Dairy	52	44,272	65,707	48
LFA specialist sheep	47	13,508	11,165	-17
LFA specialist beef	88	20,780	27,278	31
LFA cattle & sheep	67	19,102	22,556	18
Lowland cattle & sheep	8	6,119	28,439	365
Mixed	52	30,719	31,678	3
All	386	28,363	29,494	18

2002/3 NFI Forecasts

The NFI forecasts relate to farms that did not experience compulsory FMD culls or welfare culls. Interest lies principally in providing a 'barometer' of change for typical farms of different types in Scotland, and farms affected by FMD-related culls and compensation are arguably atypical for this year. The farm incomes forecast for 2001/2 was made on the basis of information on price, output (yield, area and stock numbers) and subsidy changes over the preceding 12 months. Data were taken from a wide range of sources (e.g., SEERAD commodity surveys, HGCA, MLC, and DEFRA). Much of the information used (e.g., price changes over the year) were taken from the information underlying the Aggregate Account calculations for 2002 prepared by SEERAD. The forecasts were prepared by farm type in order to capture some of the variation in prospects due to the different circumstances (e.g., different crop and stocking mixes). Modulation at 3.0% was incorporated into the forecasts.

Some of the key drivers of change are summarised below.

Whilst the wheat area is up, yields have been down and prices severely down (at 78% of 2001 levels), leading to an output change of 93% at the output level. Barley has also seen dramatic price falls, leading to general output expected to be around 79% of that in 2001. Oilseed outputs have seen increases as both yields and prices are up. Potato output has been affected by very poor prices (67% of 2001 levels across the year) even though yields were slightly up. Subsidies have in general been slightly higher than levels in 2001.

Whilst milk yields have increased, milk prices are down on 2001, leaving a milk output unchanged.

Livestock subsidies (e.g., BSPS, SCP and Slaughter Premium) have all seen increases, and particularly SAP which has now moved to a fixed amount basis. Livestock prices are generally better than in 2001 (though on the basis of incomplete information for that year), with lambs and ewes in particular seeing an improvement. LFASS payments per farm were assumed to remain the same in 2002 as 2001 in the absence of farm-specific information.

Other revenues have been assumed to have been similar to levels in 2001, although this assumption may be debated given signs in the farming sector of greater effort to seek incomes from diverse sources such as contracting.

Generally input prices have fallen, assisted by reductions in the quantities used. Feed price levels in 2002 have fallen to 96% of levels in 2001, with fuel (motor and heating) prices down too. Fertiliser prices were up but lime inputs down (around 88%), as were plant protection and seeds (to a lesser extent). Maintenance and repairs price indices (for both buildings and machinery) are up on the whole (104%). Price for general inputs, tractors and vehicles, vets) and labour were all down by a few percent. However, rental values for LFA farms were up by a few percent and contract inputs were up by 8% across the board.

Table C shows the forecast mean NFIs for 2002/3 by farm type. There are readily identifiable causes of income change at farm-level, notably falling crop prices and higher livestock subsidies and prices. Farmers themselves have responded to the continuing the low income situation by containing input costs.

Table C: Forecast Mean NFI for 2002/3 (non-FMD farms)

	2000/1 /farm	2001/2 /farm	% change	2002/3 /farm (forecast)	% change (forecast)
Cereals	4,003	-576	-114%	-7,302	-
General cropping	5,104	7,971	56%	-2,571	-132%
Dairy	13,897	33,090	138%	41,657	26%
LFA Sheep	2,878	1,230	-57%	10,073	N/A
LFA Beef	6,616	13,790	108%	22,314	62%
LFA Mixed cattle and sheep	5,999	10,273	71%	20,289	97%
Mixed	6,642	12,633	N/A	20,581	63%
All	6,076	10,438	72%	14,018	34%

Mean forecast NFI in 2002/3 overall (all farm types) is forecast to rise by 34% on 2001/2, to 14,000, driven largely by recovery in the livestock sector despite setbacks in the arable sector and a vulnerable milk sector. The fall in total crop output is compensated by the rise in livestock output, with milk falling only slightly. Overall, total outputs are slightly up with total inputs slightly down (by 2.5%) and the two effects combined give a net change of around 4,000. A slightly weaker pound against the euro improved direct subsidies in 2002 although the pound is expected to remain strong in 2002/3. Interest rates are expected to remain low at least (so interest charges are not expected to rise, but conversely investment incomes will stay low for those farm businesses which are net savers). Generally cost inflation has been low (e.g., low cereals prices have kept feed costs low).

Cereals farms are expected to see another bad year, suffering a significant drop in crop output (around 18% or 9,000) which is not compensated by a corresponding fall in inputs, leading to a substantial fall in NFI to minus 7,300. Likewise, the forecast performance of general cropping farms is forecast to see a down-turn, with the same factors affecting output leading to a negative NFI to minus 2,500. Quality has been down for cereals, especially barley, given poor summer weather. Continuous wet weather during June and July disrupted field operations although better weather in August saved the situation for many and allowed good progress to be made with harvest. Grain prices weakened substantially throughout the year, with a particularly pronounced decrease for wheat. Malting barley premiums continue to be a major issue between farmers and maltsters. Compared to the 2001 harvest, the premiums for malting grain over feed do appear to be larger, but at this year's lower base level it is unlikely that much of the grain produced, whether for feed or malting, will be economic. Wheat continues to trade at a premium to barley. There is an abundance of low-grade wheat in the UK, EU and elsewhere (e.g., the Black Sea). However, despite currently low prices, the future may be affected by the Australian drought and its switch from being a net exporter to a net importer of grain and the continuing growth in world demand (generally outpacing production, especially in China and the Far East). World stocks are tightening, though note too the impacts of the US Farm Bill with US farmers seeking to increase production, and a superb European/Black Sea planting season.

Recent movements in world oilseed markets have been driven by buoyant demand for vegetable oil. Oilseed rape prices in 2002 closed at around 165-170/t, up on 2001 by 20-25/t. The upward price movement throughout 2002 was a continuation of the trend in 2001 and saw prices reach levels not seen since the mid 1990s. Yields were up significantly too. The combination of increased potato plantings and increased yields has resulted in a situation of over-supply and depressed prices in 2002. Ware prices in particular have little prospect of any upturn in the near future. Prices for the current season's crop are significantly below those of the previous two seasons. Depression in the ware market has made seed sales more difficult, as prospects of a reduction in the 2003 planted areas seems increasingly likely.

Dairy farms are forecast to see another improvement in performance, though of nowhere near the same magnitude as last year. Milk output is not expected to change much, given that higher yields will probably be balanced out by lower prices, but with higher livestock output and lower costs (a likely reduction of 3%), mean NFI should rise by around 4,000 to 42,000. Increasing numbers of farmers have been expressing concern about the low milk prices resulting from the unexpectedly high production during the first half of 2002, coupled with declining world commodity prices over the same period. Farmer protest at low milk prices resulted in action against leading processors and supermarkets and a temporary agreement by the major supermarket chains to increase the price of milk by 2ppl, provided that the increase was passed on wholly to farmers. The cheese market is important to Scottish producers. Prices of mild and mature cheddar fell by around 25% from autumn 2001, but some recovery in the last quarter of 2002 has been seen. Another factor signalling improved positions for UK dairy farmers is the strengthening of the Euro against sterling in the latter half of 2002, although the Euro has also strengthened against the US dollar (making it more difficult for EU exporters). Nevertheless, the present buoyancy of world markets appears to have counter-acted this.

Livestock farms are likely to perform comparatively well in 2002/3. Specialist sheep farms should benefit from higher subsidies, as well as generally better livestock outputs from higher prices and subsidies, whilst also tightening on inputs. Mean NFI is forecast at around 10,000. 2002 has seen improved confidence in the sheep sector, with a welcome boost in prices for both prime and store lambs following increased demand from both export and abattoir buyers. Improvements in output prices and support payments have been much higher than cost increases, and so 2002 has seen generally improved enterprise margins over 2001. FMD left as a legacy a significant reduction (14%) in the breeding flock used for lamb production and hence lambs for sale. Export markets are now functioning normally again, and the reduced supply of lamb has met with strong demand and commensurate rises in price. Price movement in the first quarter was relatively modest compared with the autumn. Store lamb prices have also benefited from the strength of the finished lamb market and the shortage of stock. Store lambs are up by 7 to 10 on 2 years ago, with breeding sheep showing rises of 15-20, partly as a result of farmers in the south of Scotland having to restock following FMD. Early resumption of the export trade following FMD and tight supplies of lambs coming forward for slaughter has seen prices running up to 60% ahead of 2001. There has also been a considerable boost to incomes from the rise in the SAP due in 2002. Consequently, trade has been boosted for all types of breeding stock.

LFA beef farm's incomes are up due to similar factors, with mean NFI rising by 62% to 22,000. LFA cattle & sheep farms see a comparable rise to 20,000 (an increase of 97% given the lower income base in 2001/2). For LFA farms taken as a whole, mean NFI is expected to be around 19,000 (cattle output up 11%, sheep output up 27%, total outputs up 10%, total inputs down 3%), up by 92% on 2001/2. Store cattle prices have been strong throughout 2002, although with a weakening in the last quarter. The relaxation of Date Based Export Scheme Rules in autumn 2002 has made it easier for Scottish beef processors to meet the requirements for exporting meat if they so wish. However, the market is competitive and little beef has been exported yet. A consequence of FMD seems to be a shift in marketing behaviour by finished cattle producers, with a fall in auction through-put and an increase in deadweight selling compared to 2000. Scottish deadweight prices have been similar or slightly lower than in 2001. Prices in England & Wales have improved on 2001 levels and consequently the high premiums paid in Scotland during 2001 have fallen back to 2000 levels.

Mixed farms reflect the combination of farm-type specific effects, leading to a mean forecast NFI of 20,500 (an increase of 63%).

NOTES

1. Due to rounding, sub-totals in the tables may not exactly equal the sum of the component items.
2. Some of the size groups contain only small numbers of farms, and the results may not be very reliable. Results are not shown for size groups of fewer than five. Where this is the case the symbol " is used.

¹ 12 farms were affected by welfare culling; one farm was affected by both welfare and compulsory culling (this is possible as businesses may be composed of two or more holdings in different areas).