Making farm buildings work harder

With steel and building costs having increased significantly, there is a strong case for assessing existing buildings before embarking on new projects. Converting existing buildings may require considerably less capital than a new building and can also shorten planning timeframes.

While some businesses are exploring opportunities to convert buildings for non-agricultural diversification, many others want to remain wholly agricultural and are considering how existing buildings could accommodate additional livestock enterprises. Existing general-purpose buildings, for example, may be capable of generating strong returns from straw-based bed and breakfast pigs or cattle finishing, with a relatively low capital requirement for conversion.

For arable businesses, this can provide an opportunity to increase year-round cashflow, while livestock businesses may be able to diversify their income and reduce risk.

Every farm has different buildings, labour resources, feed availability, infrastructure and appetite for risk. Understanding the options, and the numbers behind them, can help businesses decide where future investment is best directed.

Converting to Bed & Breakfast pigs

B&B pigs are by no means a novel use for vacant agricultural buildings, with many in the North and East of England already under contract for weaners or finishers. However, the returns from this enterprise should be carefully assessed to ensure that the contract is working for the building.

A converted general-purpose building with space for 2,000 pigs on a straw-based bed and breakfast finishing arrangement, for example, might generate fees of approximately £45 per pig place per annum. Annual gross income could be £90,000 before straw, labour, maintenance and overhead costs, with monthly payments benefitting cashflow.

Although low variable costs (where straw is available on-farm), consideration should be given to energy and water costs and the overall impact on business overheads and labour requirements, with all these cost centres increasing. After variable and manageable fixed costs, excluding straw, the typical annual return could be in the region of £55,800.

A full cost of production assessment, on a per place basis, to include all variable and fixed costs, building depreciation, repairs and maintenance and any finance costs in relation to the buildings should be carried out to ensure that the enterprise is generating an adequate return in addition to the cashflow benefit.

The enterprise is dependent on the availability and terms of contracts offered by integrators, with payments often dependent on geography, quality and standard of buildings and infrastructure. For those with existing specialist slatted sheds and higher-spec infrastructure, payment per place may be higher than those on a more basic straw-based system, with generally higher food conversion ratio, but cost of maintaining and repairing may also be higher.

Converting to beef finishing

The recent strength of the beef sector has encouraged many farmers to examine alternative uses for existing buildings, converting general-purpose buildings to increase cattle numbers on farm. The UK cattle population remains relatively tight, supporting finished cattle prices and creating opportunities for efficient finishers.

Some general-purpose steel portal framed buildings can be relatively straightforward to convert to cattle accommodation. Depending on the existing building, investment may be centred on feed barriers, water infrastructure, penning and handling facilities, together with any necessary flooring and drainage improvements.

Beef finishing can require less specialist infrastructure than pig production, while energy consumption and maintenance requirements may also be lower.

There can also be greater flexibility to alter stocking numbers as circumstances change. That flexibility, however, does not remove risk. Where cattle are owned by the business, considerably more working capital may be required, and returns are exposed to movements in store and finished cattle prices. Feed costs can also have a significant impact on profitability, especially where the business is not growing all their own feed, and all factors should be carefully budgeted.

Contract or integrated finishing schemes, either on a buy back or B&B basis, can limit some of this market exposure and provide a more predictable income stream. Independent finishing potentially offers greater returns, but the business assumes more of the trading risk.

Both options require high-quality stockmanship and monitoring of KPIs such as daily liveweight gain. As with the pigs, a full cost of production assessment should be carried out to ensure the enterprise is performing to the full potential.

What do the numbers look like?

The difference between these approaches can be illustrated by comparing an integrated beef finishing contract with an independently operated enterprise.

The following examples are illustrative. Actual costs and returns will vary according to individual farm circumstances, cattle performance, input costs and market prices.

1. Integrated Finishing Contract

Assume an existing building can accommodate 200 finishing cattle under an integrated scheme, with throughput of 400 head annually.

On a buy-back basis, store cattle may cost around £1,300/head at 450kg and be finished at 650kg lwt at £2,100/hd.

Allowing for £420/hd feed costs, £40/hd bedding, £25/hd for vet and sundries, and £130/hd for fixed costs (including cattle finance), total cost is around £615/hd.

This leaves an indicative net return of £150.50/hd, with each batch of cattle on farm for 6 months and for 200 places, an annual return of £60,200.

The attraction of an integrated arrangement is the greater predictability of the income and reduced exposure to movements in the livestock market.

2. Independent Beef Finishing Enterprise

Alternatively, assume 200 cattle are purchased at 450kg and finished to 650kg, with 400 cattle passing through the building each year.

A purchase price of £1,400/hd has been used in this illustration, a higher cost than those purchased through the scheme. The same variable and fixed costs as above have been used at £615/hd.

A higher finished sale value of £2,190 is expected, giving a higher net margin of £175.75/hd for the 6 months on farm and for 200 places, an annual return of £70,300.

The potential return is therefore higher than under the contract finishing example, but so too is the exposure to changes in purchase prices, feed costs and finished cattle values. Currently, finished market values are high, but so too are store values and both are very much at the mercy of the market on the day.

The bigger strategic question

Against a backdrop of rising variable and fixed costs in all sectors, there is a compelling case for reviewing every square metre of the business, from buildings and yards to land, and asking whether each asset is working to deliver the return it should.

It is about matching the right enterprise to the right asset, considering the buildings available, labour resources, access to feed, capital requirements and the wider strategic direction of the business.

However, for those considering additional livestock enterprises, there are certainly opportunities to make existing buildings work harder, with different options available to suit the level of risk the business is prepared to take.