Rework budgets to help tackle farm cash deficit

Updating farm cash flow forecasts over the next few months will be vital to identify potential shortfalls and revise borrowing requirements.

After one of the worst harvests for years and the wettest autumns ever, most arable businesses will face ongoing sizeable cash deficits into the current 2013/14 year and beyond.

Farmers need to identify the size of that deficit and when it is most likely to hit, says Rob Hughes, a partner at Brown & Co’s King’s Lynn office. This will ensure they can take remedial action in time, perhaps by increasing the overdraft or phasing grain sales or other receipts with known purchases.

“While many farmers may have already reworked their original 2013 budget and cash flow figures, it may be important to revisit these as yield potential becomes clearer or known,” says Mr Hughes.

Brown & Co will be using Cereals 2013 to demonstrate the dramatic effect on cash flow that a typical farm business might experience.

The firm will base its figures on its new whole-farm budgeting model, Brown’s Farm, which is based on a typical 420ha farm in the eastern counties growing a mix of winter wheat and barley, winter oilseed rape, sugar beet and combinable pulses on light and heavy land.

“This is a bespoke budgeting tool tailored to our farming clients that will enable us to monitor performance and cash flow and how various actual and forecast factors will affect them,” says Mr Hughes.

The initial 2013 harvest gross margin budget for Brown’s Farm, drawn up before the 2012 harvest, was based on five-year yields and best-estimate prices. Oilseed rape was predicted to yield 3.5t/ha and fetch £400/t. However, a revision of the model’s budget carried out during the winter has changed the picture dramatically.

Brown’s Farm had a torrid autumn, with half of the oilseed rape failing due to rain and pigeon damage. Fields will be fallowed in an attempt to control blackgrass. Yields of the remaining oilseed rape crop are expected to be 10% down. With all OSR sales taking place at harvest, this has had a marked effect on the predicted 2013/14 cash flow.

In addition, lower wheat yields from harvest 2012 will also have an effect. Unlike OSR, wheat sales are made throughout the season. This means a 329t shortfall will be held over into late sales which will fall into the 2013/14 accounting year, as Brown’s Farm has an 5 April year-end.

Overall, peak borrowing has been pushed from the original budget’s prediction of £325,000 in July 2013 to around £450,000 in September 2013 (see graph).

This means the expected cash surplus of £15,000 for the year is now likely to be a deficit of £120,000.

“These figures make uncomfortable reading, showing not only the scale of the impact that physical effects can have on cash flow, but also the length of time they can take to feed through,” says Mr Hughes. “A further example of that is that wheat yields for harvest 2013 have also been revised down, by 15-20%. This will have a very significant effect on cash flow, but, as for the 2012 crop, not until following financial year - in this case 2014/15.

“However, being prepared will help enable a business to manage cash flow efficiently,” he adds. “We’ll be introducing Brown’s Farm at Cereals 2013 to help examine the latest cash flow projections and how they might be resolved. This will provide a useful discussion point to help visitors get their businesses back on track over the next couple of years.”