15 Sep 2020
Can British agriculture survive in world market?
It seems like a lifetime ago that one could attend live agricultural shows and gaze at the latest gargantuan piece of machinery. Occasionally a client would wistfully remark that although they would like to own such kit, it would do all the work on the farm in a week and then sit in the shed for the rest of the year – if only there were a shed big enough, and indeed if it could make its way down the farm drive in the first place. The conclusion was generally that these machines were almost display models only, with barely a handful being sold in the UK and the bulk of production destined for Canada or Australia where they could operate, unhindered by a network of hedges and rural lanes which were set out to widths defined by a horse-drawn cart.
How can the UK compete?
The more serious point is that of how the UK will be able to compete, particularly in the field of commodity crops, when other parts of the world are engaging in production on a far more massive scale. Evidence of this comes not only from the ever-increasing size of machinery, but also from the growing involvement of multi-national companies (and sovereign wealth funds) in agricultural production. The tenor of the current trade talks with both the EU and the USA are also indicative of the development as is the growing move towards larger farming units. Within Europe and the UK such growth in farm size has been limited with UK farms currently averaging 86Ha in 2019, only 4 Ha higher than the figure 9 years ago. By comparison, in Australia the figure is 4300 Ha, in Canada it is 340 Ha and in the USA and New Zealand it is about 250Ha. Over 40% of the Ukraine is in farms of over 500Ha. In Europe as a whole the average is 16Ha, with only the Czech Republic having a larger average size (130Ha) than the UK.
Cereals – a global commodity
Notwithstanding the disparity in farm sizes, cereals are a global commodity and with low worldwide transport costs, a tonne of wheat is worth much the same anywhere in the world. Whilst there are certainly economies of scale at the machinery and labour level, when one looks at input costs per tonne of production (rather than per Ha), there is a remarkable level of similarity worldwide. In a 2015 Australian benchmarking study*, Australia and North America both showed input costs of about£60/tonne of production, almost exactly the same as the Nix figure for the UK. Interestingly the same study showed labour and machinery costs per tonne as being much the same in both Australia and Europe (though about 30% lower in North America.
When one looks at worldwide wheat yields, the position becomes slightly clearer. We know that bumper harvests in Canada, Australia and the Black Sea area have the potential to destabilise world markets, but these countries have a far greater degree of volatility than mainland Europe and, specifically, the UK. Australian wheat yields over the last ten years have averaged about 2 t./Ha and in some years as little as 1.6T – indeed in some areas of low rainfall there is sometimes no harvestable crop. In the breadbasket of the Ukraine yields are up by 30% from 20 years ago but still only stand at 4T/ha. Again, late frosts can significantly reduce the cropped area – if not the tonnage/Ha where crops do survive. In the USA and Canada yields are also typically around 3T/Ha. By comparison, and despite what most would regard as a far higher level of environmental awareness, the average UK yields have been between 8 and 9 T/Ha over the last 5 years. Given that production costs are not dissimilar worldwide, the impact of yield disparity will be one of the major drivers behind land price differentials, with European land being roughly double the price of that in the USA and ten times that of Australia.
Perhaps, then, the outlook for UK agriculture is not as bad as it is painted. We certainly do not enjoy the economies of scale that can be seen elsewhere, but we do benefit from consistent output, highly fertile soils and generally favourable weather patterns, as a result of which our profitability per Ha is comparable with other producers and at least partly as a consequence, our land is significantly more valuable – if only we had more hectares!
Please get in touch with Andrew Perrott, Partner, if you need support.
*An International Benchmarking Comparison of Australian Crop Production and Profitability. Ashley Herbert 2017