Scottish farm business income: annual estimates: Methodology

Glossary

Farm Business Income (FBI) – the total income available 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. Income from diversified activities are included in overall FBI.

Farm types – farms are classified based on the how much of their standard output is from the crop and livestock enterprises on each farm.

Less Favoured Area (LFA) – land where farming is more difficult due to natural constraints, such as hills and soil quality.

Minimum Agricultural Wage (MAW) – is set by the Scottish Agricultural Wages Board each year. For this analysis an average MAW is used to cover the years included in the Farm Business Survey.

Standard Output - The standard output of an enterprise is an estimate of the average output value for every unit of production. It is defined as the estimated worth of crops and livestock without taking into account the costs incurred in the process.

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.

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.

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.

Farm Investment Income - Farm Investment Income represents the return on all capital invested 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.

Diversified activities – Farm diversification in this study highlights income generated from non-traditional farming practise. This can be in the form activities such as processing and retailing of farm produce, renting farm buildings (not connected with core farm business), wind turbines and other renewables.

Non-Farming Income - Farmers are asked to indicate into which income range 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 in Table 2.

Table 2: Sources of non-farming income

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.

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 Basic Payment scheme (BPS) and Less Favoured Area Support Scheme (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 using the component valuation method. This involves breaking the valuation of a farm into its chief component parts; bare land, farmhouse, farm cottages, traditional farm buildings, modern farm buildings and land improvements (e.g., fencing, drainage). A 10% depreciation rate is applied for all buildings and improvements on a diminishing balance method; this means that 10% of the current value of the asset will be deducted each year and means that assets will retain a residual value at the end of the expected useful life of the asset. This is applied to all assets, including short-life improvements. Bare land and farm houses are not depreciated.

Valuations: Traditional buildings, if in use as farm buildings, and cottages (most of which are over 30 years old) are given a nominal residual value of £5,000 and subject to annual revaluation. Bare land is annually valued based on the “whole farm” market. Farm house valuations are based on cost of construction materials and improvements. Values for modern buildings and improvements are initially valued on construction costs and are subject to revaluation.

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.

Balance Sheets - The balance sheets show the average opening and closing valuations of assets, liabilities and net worth (assets minus liabilities) of the farm business for each farm type, reported according to tenure type. This has been split by tenure type to account for the different financial structures of owner-occupied, tenanted and mixed tenure farms.

The tenure definitions are as follows:

• 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 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.