Scottish farm business income: annual estimates 2013-2014

2. Profitability

2.1 Farm Business Income (FBI) (Table 1)
Farm Business Income (FBI) is the average headline business-level measure of farm income, or profit, in the UK. FBI represents the return to the whole farm business, that is, the total income available to all unpaid labour and their capital invested in the business. Returns from diversified activities (non-agricultural activities that use farm resources, for example: renting out farm cottages for tourism; income from small-medium scale wind turbines; etc.) are included in overall FBI.

Figure 1: Average FBI of Scottish farms

In 2013-14 the average Farm Business Income (FBI) was £31,000, the lowest level in the last 5 years. This has remained largely unchanged from the previous year; down two per cent (£600) and down 25 per cent over five years.

The average FBI falls below zero when grants and subsidies are excluded. In each of the last five years FBI without grants and subsidies has been negative. In 2013-14, this figure was -£16,000.

Figure 2 shows a breakdown of factors affecting changes in FBI over a five year period. This shows that crop inputs and outputs have both fallen over the last year. Livestock production costs and the value of grants and subsides fell with the output value from livestock rising. It is the decline in crop output value which has contributed the most to the decline in profitability of Scottish farm businesses in 2013-14. This can possibly be explained by poor weather conditions at the start of the year which resulted in a reduction in the area of winter crops sown .

The average value of single farm payment subsidy fell by around £1,000 to £37,000 in 2013-14. This was largely due to unfavourable exchange rates.

While output values have improved over the longer term these have been outweighed by a rise in input costs ( in particular "other" costs such as: machinery; land and buildings; depreciation; and miscellaneous costs) combined with a declining average value of grants and subsidies. Labour costs are largely unchanged when compared over five years, but have fallen by £1,000 over the last year.

Specialist cattle (LFA), general cropping and mixed farms in Scotland have seen a decrease in income in the latest year. Dairy, specialist sheep (LFA), specialist cattle and sheep (LFA), lowland cattle and sheep farms showing an increase in income (on average). The average income of cereal farms has remained unchanged over the last year. Analysis of individual farm types is presented in section 7.

Figure 2: Changes to FBI components: all farm types

2.2 Return to unpaid labour (Table 1)
FBI does not include costs for unpaid labour (farmer, spouse, other partners, directors and managers) that are, to some extent, dependent on the income of the farm business. The unpaid FTE (full-time equivalent) of a farm is the number of hours worked by regular unpaid labour. One FTE is equal to 1,900 hours a year. Figure 1 shows the average FBI of Scottish farms per unit of unpaid labour.

Trends in FBI/FTE roughly mirror overall FBI at a reduced level; typically around a third lower. In 2013-14 the overall average FBI/FTE was £21,000 and it can be seen in Figure 1, that the difference between FBI and FBI/FTE was largest in 2010-11; reducing the value of FBI/FTE in that year. Over the last year, the average FTE has remained relatively unchanged.

FBI/FTE reveals more than FBI alone. When looking in more detail, for example by farm type (covered in later sections of this report), it can be seen that the average FTE varies. Therefore the finance available to remunerate unpaid labour, those with an entrepreneurial interest in the farm business, will also vary.

We can put the FBI/FTE into context by comparing it to the minimum agricultural wage (MAW) which farm owners are required to pay farm workers. This minimum is set in legislation each October. As the FAS does not fit within a single year of the legislation we have estimated a weighted MAW for comparison at £6.89 in 2013-14.

Figure 3: Average FBI/FTE, relative to minimum agricultural wage (MAW)

Figure 3 shows that from the farm accounts sample two in five farms (43 per cent) generated income roughly equivalent to less than the minimum agricultural wage, per hour of unpaid labour. At the top end, seven per cent generated an FBI/FTE between five and ten times the minimum agricultural wage, that is, between £34.45 and £68.90 per hour of unpaid labour, two per cent generated more.

Although the MAW may be less than what the person involved in this unpaid labour would expect to be paid, due to level of experience or qualifications, it is the legal minimum. It should also be noted that the income described by FBI should cover more than just the labour provided by the farm owner: there is also the unpaid management, provision for return on capital and provision of funds for further investment (beyond the depreciation charges included in costs). Comparison against the MAW is nonetheless a helpful indicator of the performance of farm businesses.

2.3 Relative performance (Table 2)
There are many factors which contribute to the relative performance of a farm business, including: tenure of the farm (with tenant farms having relatively higher overheads); prices and duration of contract for produce; supply costs and efficiency of application of inputs; level of indebtedness; as well as the motivations for farming and preferences for methods of farming of individual farm owners/managers. There are also factors which farm owners and managers have no control over, such as weather conditions, demand and the market context (for example prices of inputs). Due to these factors the profitability of farm businesses can vary greatly.

Figure 4 shows the average FBI of all farm types by quartile, i.e. the average for all farm businesses with the lowest 25 per cent of FBI values, the overall average, and the average of those farm businesses with the highest 25 per cent of FBI values. The quartile data provides an indication of how performance varies for each farm type but does not account for differences in the size and structure of the farms.

Across all farm types there was a considerable difference between higher and lower performing businesses. The overall average FBI of farms in the lower quartile was a loss of -£15,000, while those in the upper quartile generated an average income of £105,000 (more than three times the average FBI).

Figure 4: Average FBI by farm type and quartile (lowest 25 per cent, average, upper 25 per cent)

All lower quartile farms made an overall loss in terms of FBI in 2013-14. The average FBI of lower quartile farms ranged from a loss of -£22,000 for cereal farms to -£6,000 for dairy farms. Dairy farms had the highest average farm business income at £80,000.

The average FBI for upper quartile farms ranged from two to eight times the overall average for each farm type. Dairy farms had the highest upper quartile income at £205,000. Specialist sheep (LFA) farms had the second highest upper quartile income, this in part is due to a small number of specialist sheep (LFA) farms engaging in miscellaneous agricultural activities not related to sheep production.

As previously mentioned, the variation seen between the quartiles does not take into account the overall size of farms. Larger farm business will have larger input costs as well as output value compared to smaller equivalent business but both could be working with equal efficiency.

Productivity of the various farm types per quartile is further discussed in Section 4 and indicates that the difference in productivity is not as varied as the quartile FBI, as detailed in Figure 4, would suggest.