Economic Report on Scottish Agriculture 2011 Edition

Definition of Terms

PART I: FARM INCOME MEASURES

Farm Business Income

Farm Business Income ( FBI) represents the return to all unpaid labour (farmers and spouses, non-principal partners and directors and their spouses and family workers) and on their capital invested in the farm business, including land and buildings.

FBI is equivalent to financial Net Profit although, in practice, they differ because Net Profit is derived from financial accounting principals whereas FBI is derived from management accounting principles. For example in financial accounting output stocks are usually valued at cost of production whereas in management accounting they are usually valued at market price. In financial accounting depreciation is usually calculated at historic cost whereas in management accounting it is often calculated at replacement cost.

The FBI measure is designed to capture the return to the entire farm business and therefore also includes income from diversified activities on the farm. FBI has also been introduced in England, Wales and Northern Ireland and is used as the headline UK farm income measure ⁶.

Net Farm Income

Net Farm Income ( NFI) represents the return to the farmer and spouse for their manual and managerial labour and on the tenant-type capital in the farm business. It is intended as a consistent measure of the profitability of tenant-type farming. NFI is not a proxy either for farm business income or for farm household income.

• To represent the return to the farmer and spouse alone, a notional deduction is made for any unpaid labour provided by non-principal partners and directors, their spouses and by others; this unpaid labour is valued at average local market rates for manual agricultural work.
• To confine the measure to the tenant type activities and assets of the business, an imputed rent is deducted for owner occupied land and buildings and for landlord-type improvements made by the tenant; no deduction is made for interest payments on any farm loans, overdrafts of mortgages and any interest earned on financial assets is also excluded.

Cash Income

Cash Income is the difference between total revenue and total expenditure. Revenue is receipts adjusted for debtors and expenditure is purchases adjusted for creditors. It is assumed therefore that all end of year debtor and creditor payments are settled in full, even though this may happen beyond the end of the accounting year. Cash income represents the cash return to the group with an entrepreneurial interest in the business (farmers and spouses, non-principal partners and directors and their spouses and family workers) for their manual and managerial labour and on their investment in the business.

Farm Corporate Income

Farm Corporate Income represents the return to the owners of the business on all their capital invested. It is derived by deducting unpaid labour, both manual and managerial, from Farm Business Income. This allows the profitability of sole traders and partnerships to be compared directly with that of companies. Currently it is possible to estimate unpaid manual labour but not unpaid managerial labour and so the data are only approximate. The Scottish Government is currently working with survey contractors to produce estimates of unpaid managerial labour and improve this measure in the future.

Farm Income

Farm Investment Income represents the return on all capital invested Investment in the farm business whether borrowed or not. It is derived by adding net interest payments to Farm Corporate Income. Since currently the data for Farm Corporate income are only approximate, so too are the data for Farm Investment Income.

The relationship between these different income measures is shown in Diagram 1:

Diagram 1: Flow Chart Showing the Construction of the Main Economic Measures Derived from the FAS Data

PART II: CLASSIFICATION OF FARMS

Type of Farm

The classification is based on detailed sub-types as defined in the EC farm typology, which have been grouped together where required to give the types shown below. These groupings were revised in 2002 throughout the United Kingdom such that types are now comparable between countries.

The classification is based on the relative importance of the various crop and livestock enterprises on each farm assessed in terms of standard gross margin (an economic measure of output less variable costs). The method of classifying each farm is to multiply the area of each crop (other than forage) and the average number of each category of livestock by the appropriate standard gross margin, the proportions of the total contributed by the various enterprises determining the type of farm. The list below defines the main types that are dealt with in this booklet.

Type	Definition
Specialist Sheep ( LFA)	Farms in the less-favoured areas with more than two-thirds of the total standard gross margin coming from sheep.
Specialist Beef ( LFA)	Farms in the less-favoured areas with more than two-thirds of the total standard gross margin coming from cattle.
Cattle and Sheep ( LFA)	Farms in the less-favoured areas with more than two-thirds of the total standard gross margin coming from sheep and beef cattle together.
Cereals	Farms where more than two-thirds of the total standard gross margin comes from cereals and oilseeds.
General Cropping	Other farms where more than two-thirds of the total standard gross margin comes from all crops.
Dairy	Farms where more than two-thirds of the total standard gross margin comes from dairy cows.
Lowground Cattle and Sheep	Farms NOT in the less-favoured areas with more than two-thirds of the total standard gross margin coming from sheep and beef cattle.
Mixed	Farms where no enterprise contributes more than two-thirds of the total standard gross margin.

Standard Gross Margin

The gross margin of an enterprise is its enterprise output less its variable costs. Enterprise output is revenue adjusted for valuation change, plus transfers out and the value of produce used, less transfers in and purchases. Variable costs are those that can be readily allocated to an enterprise and vary in proportion to the size of the enterprise. Standard gross margin is the Scottish average for the years 1998 to 2002.

Size of Business

Since 2003/04, this has been defined in terms of standard labour requirements. Standard labour requirement is equal to 1,900 hours of labour per year. The size groups are:

Size Group	SLR definition	Description
Small	0.5 < 2.00 SLR	This represents broadly a one-two person full-time farm.
Medium	2 < 3 SLR	This represents broadly a two-three person full-time farm.
Large	3 + SLR	This represents approximately full-time farms with more than three people full-time.

Note: Actual farm employment may be above or below the labour requirements listed in the table above; the values quoted refer to an average position.

On all farms the large size group is defined as 3 SLRs and over.

Where figures for All Sizes are shown, these refer to the above groups weighted together.

Weighted Averages

The figures for All Sizes and All Types are weighted averages based on the June Census distribution of agricultural holdings in Scotland in the relevant year, by type of farming and size of business.

PART III: ACCOUNTING TERMS

Only some of the items making up output and input are shown separately in the Tables, but each is defined to show what comprises the totals.

Crop Output

Sales, including produce to farmhouse and labour, adjusted for debtors at the beginning and end of year and for valuation change. The value of non-fodder crops used on the farm for feed or seed is included.

Cereals

Wheat, barley, oats and mixed corn.

Livestock Output

Sales, including produce to farmhouse and labour, adjusted for debtors at the beginning and the end of year and for valuation change, less purchases of livestock and livestock products for resale. The value of milk from the dairy herd fed to stock is included. Breeding Livestock Stock Appreciation is excluded. The Revenue Value Pence per Litre is calculated on Milk sold.

Miscellaneous Output

Miscellaneous produce to farmhouse and labour, revenue from contracting and some other miscellaneous items, but excluding grants and subsidies, adjusted for valuation change.

Subsidy and Payments

Includes Single Farm Payments ( SFPs) and LFASS payments and all grants except those paid in respect of permanent improvements and those deducted from expenditure.

TOTAL OUTPUT

Crop Output, Livestock Output, Miscellaneous Output and other Grants, Subsidy and Payments.

Inputs

Payments and non-cash inputs (e.g. unpaid labour, rental value) adjusted for creditors at the beginning and end of the year and for valuation change.

Feeds

Expenditure on feeds adjusted for valuation change. The value is included of (a) milk from the dairy herd fed to stock, and (b) home-grown non-fodder crops fed to stock.

Seeds

Expenditure on seeds adjusted for valuation change. The value of home-grown seed grain and potatoes is included.

Labour

Wages and employer's National Insurance contributions, payments in kind, salaried management are all included.

Fertilisers

Expenditure on lime and fertilisers, adjusted for valuation change.

Machinery (excluding Depreciation)

Expenditure on machinery repairs, small tools, contract work and fuel and oil, less allowances for private use.

Miscellaneous

Electricity, vehicle taxes, insurance and secretarial costs, adjusted for valuation change.

Other Livestock Expenses

Veterinary charges, haulage and sundry expenses.

Other Crop Expenses

Crop protection, sundry crop expenses and water for irrigation.

Land and Building Costs

Rent paid by tenants, rental value of owner-occupied farms, imputed rent on tenant's improvements. Rates paid on cottages and the business share of the farmhouse. Depreciation and repairs by occupiers.

Depreciation

This is calculated on a replacement cost basis.

Breeding Livestock Stock Appreciation

The part of the change in the value of breeding livestock that is due to changes in price. It is calculated for adult female cattle, sheep and pigs.

PART IV: BALANCE SHEETS

The tenure definitions are as follows:

Tenure Type	Definition
Owner-occupied	Farms on which all of the area used for agriculture is owner-occupied.
Tenanted	Farms on which all of the area used for agriculture is tenanted.
Mixed Tenure	Farms with any other tenure arrangements. This includes farms with landlord-tenant partnerships and farms on which the area used for agriculture is split between two or more different tenure types.

The balance sheets relate to the business rather than the farmer and therefore any other assets belonging to the latter are excluded.

For land and buildings, crops and livestock, the basis of valuation is conservative market price, while for machinery and equipment it is depreciated replacement cost. Particularly in the case of land and buildings, the balance sheet entries need to be treated with some caution in respect both of the absolute level and of the year-to-year trend, and it follows that this caveat extends to dependent figures such as net worth.

PART V: QUARTILES

To produce performance bands by quartiles, FAS results were ranked by NFI and averages produced for the output and input values categories reported for the top 25 per cent and bottom 25 per cent by farm type and reported against the full analysis for that particular farm type.

PART VI: NON-FARMING INCOME

Farmers are asked to indicate into which of ten income ranges the joint non-farming income of the farmer and spouse falls for each of six separate sources of income. The sources of income are listed below:

Source of Income	Description
Off-farm employment	Paid employment off the farm.
Off-farm self-employment	Businesses (other than another farm) owned or operated away from the farm holding. Director's fees are included here.
Investment	Interest receipts on personal bank, building society and similar accounts. Rental income deriving from property off the farm and some dividends on shares are also included here.
Pensions	Includes income from retirement, widow's and disability pensions as well as from occupational and state pensions.
Social Payments	Includes payments such as child benefit and family credit.
Other off-farm income	All other off-farm income. Various commissions, and retainers, come into this category.

PART VII: THE TIME PERIOD COVERED BY THE 2009/10 FARM ACCOUNTS SURVEY

The survey is not carried out on a calendar-year basis but based on farms' financial years. The exact period covered by the survey, for any given year, will vary across the sample depending on individual businesses' accounting year ends, although they all centre on the same cropping period. For example, the 2009/10 accounts all centre on the 2009 production and subsidy year. The spread of closing valuation dates from the autumn of one year to the spring of the next means that (unavoidably) some of the 2009/10 accounts relate to the 2008 winter whilst others relate to that of 2009.