Farmbench: Knowing your cost of production can help your business in the future

Knowing and managing your cost of production is important for achieving a positive net margin. So how does your farm compare with the regional and national averages, and where are your greatest opportunities for improvement?

The Basic Payment Scheme was a significant contributor to overall farm profitability. While the Sustainable Farming Incentive will help make up the shortfall, it will not fully mitigate the loss of direct payments.

What role does the Basic Payment Scheme (BPS) play in relation to core agricultural income?

The December 2023 BPS payment was the last of the progressively decreasing BPS payments. From 2024, delinked payments have replaced BPS; these payments will continue to reduce each year until they finish in 2027. So how will the average livestock farm survive with these changes?

According to data from the Defra Farm Business Survey, between 2019/20 and 2021/22, core agricultural income for lowland grazing livestock averaged a £6,266 loss per year. Less Favoured Area (LFA) grazing livestock saw higher losses of £7,666 per year.

Overall farm profitability has relied predominantly on BPS to cover the shortfall. On average, over the 2019/20 to 2021/22 period, BPS made up 76−79% of total farm income. This is in addition to income from agri-environment and diversification.

Top-performing farms manage cost of production to achieve a positive net margin

Farmbench data from 2021/22 showed that the top 25%-performing farms across both beef and lamb enterprises achieved a positive net margin – before any BPS or SFI payments.

So what are the main differences between the top-, middle- and bottom-performing farms?

Table 1. Full economic margin (£) achieved by top-, middle- and bottom-performing beef and lamb enterprises (2021/22)

Source: AHDB Farmbench 2021/22

They have vastly different costs of production, with the top performers retaining a far greater percentage of their income. This indicates that the main driver of a positive net margin is a low cost of production, not a higher sale price.

Table 2. Retained enterprise income (%) achieved by top-, middle- and bottom-performing beef and lamb enterprises (2021/22)

Source: AHDB Farmbench 2021/22

Benchmarking your cost of production can help you identify your strengths and weaknesses

Our analysis shows that the Sustainable Farming Incentive (SFI) is not going to be enough to mitigate the loss of direct payments, although our article on stacking SFI options shows that the right combination of actions could make up some of the shortfall.

In this changing environment, knowing your cost of production and net margins, as well as understanding your business’s strengths and weaknesses, is important for building long-term stability and profitability.

Farmbench allows you to compare your enterprises, in detail, against national benchmarks, including the following questions:

• How does your cost of production per kilogram compare with the averages for 2021/22 in the table below?
• Are you spending more or less than average on feed and forage?
• How many labour hours are you spending per animal compared with the average?

Table 3. Cost of production (£/kg) achieved by top-, middle- and bottom-performing beef and sheep enterprises (2021/22)

Source: AHDB Farmbench 2021/22

The aim of Farmbench is to help you have a better understanding of your business. Using data to make evidence-based decisions allows you to improve profitability and productivity and puts you in control of your future.

The 2021/22 analysis shows that livestock enterprises can be profitable without the support of BPS. What can you learn about your business to help build resilience for the future?

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