Scottish farm business income: annual estimates 2016-2017

2. Profitability

2.1 Farm Business Income (Tables 1, 12)

Farm Business Income (FBI) provides a business-level measure of farm income in Scotland. 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 2016-17, the average FBI was £26,400, a 94 per cent increase in real terms from the previous year, up £12,800, and 46 per cent lower in real terms than 2011-12.

When subsidy payments are excluded, the average FBI is a loss of £14,900 in 2016-17^[2]. For each of the last six years, FBI without subsidy payments has been a loss (Figure 1).

Changes in the components which make up FBI are shown in Figure 2 for the last year and over the six-year series. Between 2015-16 and 2016-17 spending on crop and livestock inputs decreased on average, by five and six per cent respectively. Revenue from livestock outputs decreased by two per cent on average but revenue from crop outputs, diversification and subsidies all increased, resulting in the overall increase in FBI.

The Basic Payment Scheme (BPS) replaced the Single Farm Payment Scheme (SFP) in 2015 as the method of allocating funding through Direct Payments^[3]. The average value of subsidy from BPS and other support payments increased by five per cent to an average of £41,300 in 2016-17 (from table 1).

Both revenues and spending for livestock have decreased since 2011-12, 16 per cent and 11 per cent respectively. Revenues from crop outputs have reduced by 34 per cent while crop inputs reduced by 28 per cent. This combined with a 22 per cent decrease in the value of subsidy payments led to a general downward trend in profitability over the six-year series.

Figure 2: Changes to FBI components: all farm types

All eight farm types experienced an increase in overall FBI between 2015-16 and 2016-17 (Figure 3). Dairy farms had the largest increase with the average FBI rising by £33,000. This was largely due to the decrease in spending on inputs as well as an increase in revenues from per head of livestock, crops, diversification and subsidies. Milk prices for farms in the survey remained constant at £0.21 per litre between 2015-16 and 2016-17. Mixed farms had the second largest increase in average FBI, rising £22,700. This was mainly due to an increase in revenue from crop and livestock outputs, as well as subsidy payments, and a decrease in spending on crop inputs. Cereal farms FBI more than doubled between 2015-16 and 2016-17, increasing by £12,600. LFA cattle and sheep farms profitability was up 54 per cent (£12,400), whereas lowland cattle and sheep farms were up 47 per cent (£5,800). The average FBI for general cropping farms increased by 50 per cent (£15,700), LFA sheep farms increased by 71 per cent (£5,800) and LFA cattle farms had the smallest increase in average FBI, rising by eight per cent (£1,900).

Figure 3: Average FBI by farm type

Analysis of individual farm types is presented in section 7.

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 as if it were a wage paid to the unpaid labour on the farm.

Trends in FBI/FTE over the six-year series roughly mirror overall FBI at a reduced level; typically around a third lower. Over the last year, the average FTE for all farm types has remained relatively unchanged. In 2016-17 the overall average FBI/FTE was £17,800, twice the previous year’s value.

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 per person 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 wage is set in legislation each October. As the FBS does not fit within a single year of the legislation we have estimated a weighted MAW for comparison at £7.20 in 2016-17.

Figure 4: Average FBI/FTE, relative to MAW 2016-17

Figure 4 shows that 45 per cent of farms in the 2016-17 survey generated income equivalent to less than the MAW, per hour of unpaid labour. Nine per cent of farms in the survey generated income at least five times the MAW, which is at least £36.00 per hour of unpaid labour.

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. These include: 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 over which farm owners and managers have no control, such as weather conditions, demand and the market context (for example prices of inputs). The profitability of farm businesses can vary greatly because of these factors.

Figure 5 shows the average FBI of all farm types by quartile, i.e. the average for farm businesses with the lowest 25 per cent of FBI values, the overall average for all farms, and the average for 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.

Figure 5: Average FBI by farm type and quartile (lowest 25 per cent, average and upper 25 per cent) for 2016-17

For all farm types in 2016-17 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 £15,100, while those in the upper quartile generated an average income of £94,400, more than three times the average FBI.

Dairy farms had the largest range in average FBI between lower and upper quartile businesses, with lower quartile farms averaging a loss of £56,100 and upper quartile farms having an average income of £148,900. These values are, respectively, the lowest and highest average FBI across all the farm types.

All lower quartile farms made an overall loss in terms of FBI in 2016-17, with the exception of LFA cattle and sheep which made a profit of £2,600. The average FBI of lower quartile farms ranged from a profit of £2,600 for LFA cattle and sheep farms to a loss of £56,100 for dairy farms. The average FBI for upper quartile farms ranged from £64,000 for lowland cattle and sheep to £148,900 for dairy farms.

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 revenue compared to smaller equivalent business but both could be working with equal efficiency. This may explain the extremes seen in dairy, compared to the lack of variation in lowland cattle and sheep.