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Taking steps to make sure bigger fertiliser bills don’t create too big a hole in your cashflow

1 February 2022

While the rising price of fertilisers have grabbed the headlines this autumn and winter and there has been much talk of how mitigate the prices rise in the field there has been much less comment on how these prices will put increased pressure on farm business cashflows and borrowings. This will not only cause worry and distress to the individual but will also require them to think about how this impacts on their bank balance going forward. What should farmers bear in mind and what steps can they take to keep their finances in check?

How much has fertiliser gone up?

For a 120 hectare (300 acre) mixed farm growing 80 hectares (200 acres) of spring barley with 40 hectares (100 acres) of grazing grassland, the difference in fertiliser costs in 2021 and 2022 using typical grades, rates and prices are shown below.

CropGradeRateTotal Req.
(t)
Cost/ton
2021
Total
2021
Cost/ton
2022
Total
2022
Spring Barley16:16:16375kg/ha30£350£10,500£650£19,500
29:0:0:15225kg/ha18£225£4,050£650£11,250
Grass25:5:4300kg/ha12£230£2,760£625£7,500
Total£17,310£38,250
Overall difference in fertiliser cost 2021 vs 2022£20,940

In the example the business has increased it’s fertiliser expenditure by £20,940, this is before VAT is considered which would add an additional £4,188- in other words it has to pay out over £25,000 more compared to the previous year. As interest rates are rising this will also bring a further cost, so if the borrowings are increased by £25,000 for a six-month period at 4%, this will cost an additional £500 in interest.

Plan ahead- know where the peaks and troughs will be.

Taking the time to look at how cash will move in and out of your business over the months ahead is the starting point. For some this will take the form of preparing a cashflow, often just a simple spreadsheet which shows the changes to the bank balance over a period. A simple template from the Farm Advisory Service can be downloaded here. For some however this may seem quite daunting, so even sitting down with a pen and paper and compiling a rudimentary list of your outgoings and income can give an indication to any problems ahead. Breaking this down into specific months can pinpoint where extra care is needed.

When completing cashflows there a few things to remember- just because stock or grain leave the farm one month, it may well be the following month before you are paid. Always allow some slack in income figures- just because you normally receive a payment in a certain month – e.g. BPS – it doesn’t necessarily mean it will be received in the same month this year. Everything should be included, from trading expenses, HPs and loan repayments, personal drawings and capital expenditure and on the other side any income that is paid into the business e.g. rents.

This process is worthwhile- it lets you see how your bank balance will change- perhaps existing facilities will cope although for some it may mean having to consider other options. It is also worth revisiting the cashflow as the season progresses- inevitably some costs and receipts will differ from that in the budget and reviewing it from time to time allows these to be taken into account.

What are my options if my overdraft won’t cope?

For a number of businesses, they will find that after running a tight ship for a number of years and managing their cashflows effectively, their existing facilities are not enough.

There are some simple measures that could help – for instance if you are on quarterly VAT returns make sure you can reclaim it as soon as possible after payment- get it wrong and your business has to carry that additional debt for three months. Also look at the deals that your merchant is offering in terms of payment and delivery- they may be prepared to delay payment for a couple of months until it coincides with a suitable time (e.g. selling store cattle) although in most cases this extra credit will be factored into the cost.

Looking at your trading patterns may also allow money to be brought forward- should you sell grain at harvest or leave it until later in the autumn? Should stock be taken through to fat or perhaps sold earlier as forward stores? The latter may also depend on whether expensive feed is having to be bought – putting further pressure on cash flow, the prices available and the overall effect on profitability.

One of the cheapest forms of extra credit will be by looking at extending existing overdraft facilities. Bank managers don’t like nasty surprises so discussing it with them well in advance is key and if you have already prepared your cashflow, you are armed with the figures to show them exactly what you need and why – it also shows that you know and understand the ins and outs of your business.

There is no doubt this year will see more finance being offered through merchant finance schemes. These are popular for covering inputs whether it is fertiliser, seed or sprays, and are repaid usually following harvest over several months including the interest and arrangement fees. For some this will be an option but remember the repayments have to fit in with your income, otherwise you may only be moving the problem back six months and be unable to pay. The risk then is that the business falls into a debt cycle where it is trying to repay the previous years inputs as it is ordering or even using the following years, and never managing to “clear the slate”. As always, all credit agreements should be read and understood thoroughly.

Every growing season brings its challenges, although this year will also bring bigger financial ones than usual. Being prepared and looking at your cashflow can help however, by putting mitigation strategies and measures in place. By doing so this can help give you piece of mind, allowing you to focus on running the farm.

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