As an agricultural accountant, my “day job” is producing accounts for our farming clients, to help them understand the financial performance and position of their business.
But what if we apply that process to the whole of UK Farming Ltd? What can we learn about the current health of the sector and its ability to meet the challenges which lie ahead?
The business has been consistently profitable since at least 1973 and in its latest accounts, for the calendar year 2016, it reported a profit of just under £4bn.
There have, of course, been some considerable challenges throughout those 44 years in the forms of weather (drought and floods), major animal disease (foot and mouth, and BSE), and political intervention (the CAP). Yet the business has remained resilient throughout.
However, in real terms, it produced a profit of nearly £10bn in 1973 which has fallen to the current £4bn, the latest figures representing the third consecutive annual fall.
In the meantime, UK Farming’s customers have enjoyed ever more abundant supplies of healthy, safe and nutritious food – arguably the best in the world. The market is very strong and potentially growing.
The current accountant (known as Defra), is a bit slow on this one and has only just produced the December 2015 set of figures.
They show that the business had total assets of £282bn, but after deducting total liabilities of £17bn, net assets stand at £265bn. In real terms, net assets have doubled since 1984, making this one of the strongest balance sheets I have ever reported on.
There are a couple of key ratios to look at:
“Gearing” – the relationship between debt and net assets – is a meagre 6.4%. It is usually considered safe if this figure is below 75%.
“Liquidity” – a measure of the ability to sell stock in order to meet short-term borrowing – is 280% against a conventional safe position of 100%.
On both these points, this is the strongest balance sheet you will ever see.
It is difficult to find accurate records on this, but I understand that, of late, the overdraft has been going up.
This is probably the greatest concern in that UK Farming has not produced enough cash from trading to cover its needs. Reinvestment, return to the owners for their work and ownership, long-term debt repayment and tax can only be covered by increasing borrowings.
UK Farming is not a great user of the banks, borrowing as it does just £17bn. It has capacity to borrow a great deal more and the banks are generally keen to loan more money to the business because it has such a strong balance sheet.
As already stated, UK Farming is already struggling to meet its commitments, because of the relatively modest level of profits (just 1.5% return on equity) and regular demand for investment, be it technology, animal welfare or improving food standards.
The business can certainly borrow more, but the trick has to be whether in so doing, it can secure long-term income streams that will be sufficient to meet requirements.
UK Farming has certainly spent more in interest in the past – despite its now record levels of debt. In 2016, it spent just £42m on interest, less than half the amount it spent in 1990 when, in real terms, profits were at a very similar level.
It is useful to analyse a large mixed business in its various divisions, to see which are contributing most. This business has tens of thousands of individual units and I am afraid there isn’t enough time to research that without me having some realistic certainty that I will eventually obtain this business’s accountancy engagement….
But this is where the real story is. The headline statistics for UK Farming are nothing more than interesting. We should not be hung up on the aggregate figures – I cannot comprehend a time when it will not be one of the strongest sectors in balance sheet terms in this country’s economy, let alone the supply chain that it is part of.
However, individual units will undoubtedly have insufficient profit, too much borrowing and/or weak balance sheets. They should make sure that their accountant is explaining their position and prospects fully with the benefit of each year’s accounts, putting it in context with the wider sector position and making recommendations for the future.
Summary of 2016 Accounts
In summary, I’d describe UK Farming as a supremely strong business, but with enormous variation between individual farms. Energy should be put into understanding and improving each one in order to maximise profit. There is massive capacity to take on “good borrowing” for investment, but only if it generates increased profit and cashflows for the future.
Without that it is inevitable that it will have to sell some assets eventually to repay that debt.