Ifac urges farmers to reduce pressure on cash flow now to mitigate impact of rising costs next year

Ifac, Ireland’s farming, food and agribusiness specialist professional services firm is encouraging farmers to prioritise budgeting and cash flow management to mitigate the impact of rising costs and tight profit margins.

From a financial perspective, 2021 has been a good year on most Irish farms. Commodity prices are up for milk, beef, lamb and crops. Input prices were relatively stable for the first nine months and weather conditions for both grass and crops were excellent. Taken together, this combination of factors should result in higher profits in 2021 when compared to 2020.

Looking to 2022, while the outlook for dairy, beef, lamb and crop prices is bullish, rising input costs will hit profit margins.  Currently, fertiliser prices have almost doubled when compared to this time last year while feed prices are up by about 20%. Fuel and energy costs are also rising. With tight margins on many farms, good cash flow management will be critical in the coming months.

Ifac estimates that dairy farmers could be facing a potential extra cost of 4 or 5 cent a litre over 2021 (€591 per ha); beef farmers are likely to see input costs increase by €187 per ha over 2021; tillage farmers could face a potential extra cost of €281 per ha over 2021.

Philip O’Connor, Head of Farm Support at ifac said: “The combination of the impact of these cost hikes (potentially impacting profits by as much as 50% on dairy farms and 60% on livestock farms) as well as other financial commitments such as drawings, loan repayments and tax, are likely to lead to cash problems for many farmers. This is not a position any farmer will want to find themselves in next year and it’s why this is the time to look for practical ways to reduce the pressure on cash flow.”

Here you will find examples of the impact rising fertiliser and feed costs will have on the profitability of two farms in 2022 – (1) a dairy partnership with 148 spring calving cows on 78ha, and (2) a farm with 40 Suckler cows, 110 ewes, 20 bought in calves, with 64 ha, 28 ha rented (these examples, based on real farm accounts, show actual outcomes for 2020 with forecasted year-end accounts for 2021 and 2022 and they include other costs increased at 3% in line with consumer price index increases, such as diesel, contractor, and energy costs, all of which are rising at the moment due to global factors).

Here you will find an example of a tillage farm in the South East with circa 122ha (300 acres) of which 23ha is leased. This farm’s crop rotation policy includes Spring and Winter crops of wheat, barley, oats, oilseed rape, and beans.

Now is the time to review cash flow and potentially look at your farm’s existing credit limits and funding options, not next spring if the farm runs into cash flow issues. Here are some of the steps farmers can take:

Prepare a budget

Depending on your type of farm, working out your fertiliser, concentrate and feed requirements will help you estimate what you need to budget for in the coming year. You also need to take into account that fertiliser and fuel costs are rising when compared to 2021. When input costs are rising, reducing your turnover may reduce your costs by a higher % and therefore could improve your profit margin. Where is the optimum profit margin on your farm?

You also need to look at both your income sources and any other costs you expect to incur. Once you have this information, you will be able to produce a financial budget and predict whether you will be cash positive or negative in 2022.

When you know where you stand, you can then look for opportunities to reduce your costs and maximise your profit margin or consider setting aside some cash to help tide you over next year. However, if you expect to be cash negative after drawings, loan repayments and tax, you need to review your loans and interest rates and look for opportunities to secure better value. Where available, consider using savings to support working capital if necessary. Other options to consider include delaying non-essential capital expenditure or examining funding options – the three main banks recently launched a new round of Brexit support loans via SBCI – these have very favourable rates and are unsecured over 6-years. And remember, if not used then no interest costs are incurred.

Seek advice

Your accountant and agricultural advisor can provide practical advice to improve the overall performance of your business and show you how your farm is performing when compared to similar farms in your sector. Benchmarking your business in this way will often highlight opportunities to enhance your operation and improve your margins.

Philip continued, “In ifac, we always promote the concept of a ‘farming team’ where farmer, accountant and agricultural advisor work together for the benefit of the farm. By bringing all of your professional advice together, you get a deeper understanding of your business which enables you to identify and address potential problems, grab opportunities, and make the right decisions at the right time so that your farm can survive and thrive both now and in the future.”

Know your risk profile

To manage your business effectively, you also need to understand how much financial stress your farm can take.  Some risks are within your control, while others (such as market risks, regulatory changes and new consumer trends) are external. Conducting a risk assessment will help you identify where your business is vulnerable, enabling you to take action to reduce your risks (see questions to consider in Notes to Editors).

Forward planning

Looking to the medium and longer-term, CAP changes, environmental issues and achieving financial sustainability are among the key challenges that all farmers need to plan for. All of these issues will involve either a potential drop in income or increased expenditure (see questions to consider in Notes to Editors).

Further considerations for farmers

Considerations for tillage farmers for reducing costs and protecting profit margins:

• Nitrogen usage — Your objective should be to achieve optimum yields and maximise your profit margin. Using more nitrogen to drive higher yields will not be cost-effective if the additional yield does not cover the cost of the fertiliser. A fertiliser merchant recently advised that the first 160kg N/Ha will achieve the greatest return of investment given current prices.
• Alternative sources of nitrogen — Can you import organic fertiliser such as poultry litter or pig / bovine slurry? Keep in mind that there are regulations when importing slurry and you must test the quality before spreading.
• Forward selling crops — this decreases the risk of lower crop prices next Autumn and allows you to spread next year’s costs over two years (2021 and 2022).
• Crop rotation – While crop rotation is a medium to long-term measure to improve soil quality and reduce chemical fertiliser dependence, in the short term it is worth considering options such as Spring oilseed rape. With forward prices quoted at €540+, you should be able to predict your input costs, estimate likely yields and achieve a reasonable profit margin.

Questions to identify common farm business risks:

• What is your risk profile? How resilient is your business? How much financial stress can it take? How much liquidity (cash) is available?
• Is your stocking rate too high (putting pressure on the farm and driving up feed costs)?
• How reliant is your farm on leased/rented land? Will the price per acre increase or could you potentially lose it?
• Is it time to look at clover and multi-species swards (to reduce reliance on chemical nitrogen)?
• Is fertiliser being wasted? Do you have a fertiliser plan? Maybe consider technology such as GPS to reduce waste?
• How efficient is your farm now? Are you benchmarking to find areas where margins can be improved?
• Nitrates – will your farm need investment in the future?
• Business structure – are you in the right structure going forward to cater for – tax, potential capital investments, succession?

Questions to consider when forward planning:

• Will the new BISS payments mean a drop in income for your farm?
• Will you be able to avail of the new environmental schemes?
• Can you reduce your dependence on chemical fertilisers (e.g., by better crop rotation, using lime to achieve the right PH, switching to alternative organic fertilisers)?
• Could technologies – GPS, self-steering tractors, etc – help you address these challenges (GPS can reduce fertiliser and spray usage by up to 10%. TAMS grants are available for this equipment)?
• Will your farm need to reduce stock numbers or find more land?
• Will you need to build additional slurry storage or upgrade existing uncovered storage?

About ifac 

• Ifac is 45 years in business providing specialist advice to the farming, food and agribusiness community – it has been at the heart of agriculture and food since 1975. It is a co-operative owned, professional services firm operating from over 30 locations across Ireland, with over 450 people serving 20,000 clients nationwide.
• It specialises in tax advisory, accountancy, pension planning, succession planning, and a myriad of other financial services, helping clients to build profitable and sustainable businesses.
• Ifac is Ireland’s eighth-largest accountancy firm by turnover and largest by the number of clients
• For more information see ie.