Breakeven yields; an alternative way to view profit margins

Beating a forecast 2021/22 UK average wheat yield by 1.0t/ha could net an average farm business a gross margin per hectare 88.6% higher than if the average yield was achieved.

This is based on the price of Nov-21 futures yesterday, and excludes the value of straw, storage costs and subsidy payments. This difference alone highlights the importance of a solid marketing plan, to enable unexpected yield shortfalls to still return profit.

What is the average expected yield?
In April, the USDA Foreign Agricultural Service forecast the average UK wheat yield at 8.3t/ha, which if realised would be 4% above the five-year average. The bright, warm start to June coupled with the wet May, may well put crops in good standing to reach north of this forecast yield.

As we are all aware, yield is the key parameter in achieving a positive profit margin. The below table shows a yield of 8.8t/ha is still just profitable at £145.00/t sell price. However, achieve the forecast average of 8.3t/ha and a net loss is pencilled in at that sell price.

Crop yields and gross margins
Knowing the cost of production is a vital figure to add to any farm business plan, enabling marketing strategies to be tailored towards specific profit goals. It also enables examining of variable and overhead costs to streamline costs and benefit profit margins.

The table below is produced from a basic cost of production (using AHDB FarmBench data) and includes average winter wheat variable and overhead costs, without strict storage costs and subsidy payments. FarmBench can be signed up to here.



How much tonnage is pure profit?
The breakeven yield of a crop offers another way for growers to look at gross margins.

Using four-year average variable (£493.00/ha) and overhead costs (£776.00/ha) from FarmBench analysis, a basic cost of production can be produced. From this, using yesterday’s UK Nov-21 close price of £176.95/t, a breakeven tonnage of 7.17t/ha is seen, with tonnage above this then the profit.

In this case, should the wheat price fall to £150.00/t then the breakeven yield rises to 8.46t/ha, notably above the USDA FAS forecast yield of 8.3t/ha.



As you can see, the 7.17t/ha breakeven yield forms a large proportion of the forecast 2021/22 wheat yield. Even if 8.3t/ha is an easy target to pass for some and 9.0t/ha+ is the achievable average farm yield, any domestic wheat price declines will push up the breakeven yield figure. Warm dry June weather will help crop yields no doubt, but a higher than expected domestic production figure will pressure UK wheat prices.

This high breakeven yield stresses the importance of selling the ‘profit tonnage’ at the best possible value. The optimal end-market is different for each farm business, dependant too on individual risk appetite. But, premiums can be gained through specific quality requirements or proximity to end-location. Possessing knowledge of future price direction is key to determine optimal selling points, selling forward could help margins too.

It also emphasises the significance of on-farm wastage, in the form of storage, drying or machinery setups. Any tonnage saved by improving this aspect will contribute to margins.

The phasing out of the Basic Payment Scheme is something key to note for farmers, with annual reductions until 2028 hitting returns for farm businesses. The more environmentally focused replacement, known as ELMS, will bring payments based on ecological requirements. It is unclear how the new ELMS scheme will stack up against BPS for payments received. However, any reduction in payments can bring into focus the emphasis on not just growing a profitable crop, but also a sound grain marketing plan.

Breakeven yields; an alternative way to view profit margins
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Hampton

Member
Location
Shropshire
It’s like the perfect storm of bullmuck
Ahdb pushing forward selling and options etc based on a USDA prediction of a higher yield than average.
What’s the usda predicted it’s own yield to be? Let me guess, above average?
 

Rejuvenating swards: Which option is best?

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Written by Brian McDonnell

Maintaining grass quality during mid-season grazing is important. Farmers can maintain quality by entering ideal grazing covers of 1,300 – 1,500kg DM/ha, and grazing down to a residual of 4cm every rotation.

If you are now in a situation where cows are not cleaning out paddocks as well as they should be, leading to the development of steamy grass within the sward, here are some options.

Common options for rejuvenating swards include:

  1. Take a silage cut, probably into bales, remove the material and start again with the aftermath...
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