Development of results and

results and profitability in agriculture and horticulture

The profitability in Finnish agriculture and horticulture is examined using the results of Luke’s bookkeeping farms. The data from around 800 bookkeeping farms are weighted so that they indicate the av-erage results of the 34,500 largest agricul-tural and horticulagricul-tural enterprises. These account for more than 90% of the output of Finnish agriculture. In calculating the results, individual revenue and expense

items are allocated to the year of produc-tion, in accordance with the accrual prin-ciple. Thus, yields, production volumes and returns, and changes in prices and support payments are directly reflected in annual profitability figures.

Farm size increases, while total return decreases

A farm’s total return includes the value of the products sold and the subsidies received during the year, as well as the change in the products and supplies in stock, and the value of feed produced and used at the farm, i.e. the value of farm use. Farm use refers to the value of the feed or cereal produced on the farm and used to feed the livestock or the

val-productionCrop

Pig husbandry 4%

Distribution of farms receiving agricultural support according to production line in 2017 (main regions of Uusimaa and Åland according to NUTS II have been included in Southern Finland).

Source: Finnish Agency for Rural Affairs.

ue of the cereal used as seeds. In 2016, the total revenue per farm averaged

€150,600, with a decrease of around 3%

from the previous year. In this decade, the highest total revenue, €158,100, was recorded in 2014. In 2006, the total reve-nue was €108,000 per farm. From this, the increase in total revenue is €41,800 (39%) per farm. In the same period, the average cultivated area per farm increased from 48 to 63 hectares and the number of an-imal units rose from 25 to 28. According to a forecast, the total revenue in 2017 grew by 1% from the previous year, to

€152,500 per farm.

Total revenue has continued to grow slowly throughout the decade from 2006 to 2016, but the growth stalled or took a downward turn in all production lines at the end of the decade. The effect of the increasing farm size and the structural development on total revenue has been hidden by the falling producer prices, as producer prices took a downward turn from 2012–2014, following a period of in-creasing prices.

In terms of the share of direct sup-port of total revenue, there is great var-iation between farms representing dif-ferent production lines. In recent years, the average share of support has been around one third of total revenue, which is slightly down (2–3%), compared to the beginning of the ten-year period. In 2016, the share of support was the larg-est in sheep and goat farms (62%) and cereal farms (55%). The share has varied by a few percentage units from one year to the next due to changes in support systems, but also because of variation in yields and prices. In 2016, the share of support of total revenue was the smallest in greenhouse enterprises (7%) and poul-try farms (10%). Here, the share of sup-port has more than halved, compared to the situation ten years ago.

Entrepreneurial income halved in a decade

Entrepreneurial income is the part of a farm’s total revenue that is left for farm-ers (entrepreneur) for their work and own capital invested in their business activ-ities. Thus, all costs excluding the wage claim on own labour and the interest claim on own capital are deducted from total revenue. Entrepreneurial income can be used to cover the needs of the farmer’s private household. If the objective is to continue farming, and the depreciation of assets is used to finance replacement investments, the entrepreneur will not, in the long term, be able to withdraw for own use more than the entrepreneurial income from the farm profits.

Entrepreneurial income per farm (fig-ures 1 and 2) was €11,200 in 2016. Com-pared to the situation ten years ago, the figure is down €9,000. Despite increasing farm sizes, entrepreneurial income has halved. In the long term, the increase in input prices has been greater than the in-crease in producer prices. This has eaten away a substantial portion of the poten-tial increase in entrepreneurial income generated by structural development and improved production efficiency. Variation in yields also cause annual changes in en-trepreneurial income. The lowest entre-preneurial income, less than €1,000, was earned in cereal farms and sheep and goat farms. Variation among farms is great, but even the most successful cereal farmers only make an entrepreneurial income of

€16,000. In terms of total revenue, green-house enterprises are the largest, with an entrepreneurial income of €62,200 in 2016, which is considerably higher than in oth-er production lines. Greenhouse farming and poultry farms are the only production lines with a clearly higher entrepreneurial income (55% and 70%), when compared to the levels ten years ago.

Work has been replaced by capital In the point of view of entrepreneurs, en-trepreneurial income is a key indicator but, alone, it does not indicate the profit-ability of operations. Other factors, such as the farming family’s capital tied up in the business operations, and the value of their labour contribution must also be accounted. In 2016, the farming family’s average labour contribution per farm was 1,880 hours. The trend has been de-creasing in the past ten years (-22%). The biggest labour contributions were made on milk farms (4,150 hours) and in green-house enterprises (3,390 hours).

The amount of own capital invested in business operations by farming fam-ilies has been on the increase through-out the 2000s. It has increased by 52%

from 2006 to €338,000 per farm in 2016.

The strongest growth has been seen on livestock farms. In the past few years, however, the growth of own capital has stalled to virtually a standstill. The larg-est amount of own capital is tied up in pig farms (€743,000) and in poultry farms (€590,000). Increase in liabilities has been only slightly slower than in own capi-tal and, throughout the ten-year period, the equity ratio has remained at around 72–75%.

Profitability at a poor level

Profitability ratio is considered one of the best key indicators of profitability. It is calculated by dividing entrepreneurial income by the sum of the wage claim of the farming family’s own labour and the interest claim on own capital invested in farming. The higher the ratio, the better the compensation achieved for the labour and capital. In 2016, the average profit-ability ratio was 0.26 and the same level is forecast for 2017. Greenhouse enter-prises, poultry farms and farms engaged in outdoor horticulture production were the most profitable, but still, the average

profitability ratio of all of them remained below 1. In cereal farms and sheep and goat farms, the ratio was near zero, and in milk farms, it was 0.31. In the past decade, the profitability trend has been on the de-crease, following the decrease in entre-preneurial income. In the short term, it is impossible for farmers to adjust their use of labour and capital to match the poorer expected returns.

The return on total assets is obtained by deducting all expenses from total rev-enue, excluding the interest on liabilities (including the wage claim for own la-bour), and showing the difference in pro-portion to the entire capital of the farm. It tells the same sad story of poor profitabil-ity as the profitabilprofitabil-ity ratio: the return on assets was negative in 2016 (-3.3%), and has not been positive at any time in the past decade. A negative return on assets means that the value of farmers’ own cap-ital has decreased in the long term; they have been forced to “eat” their capital.

The picture painted of the develop-ment and level of profitability of farms is desolate, as is the forecast for the results for 2017. We should remember, however, that there is also great variation behind the average figures within production lines. For example, the average profit-ability ratio among the most success-ful quantile of the dairy and beef farms was bearable, at 0.7–0.9 in 2016. On the most successful cereal farms, it was 0.65, while the figure among the most suc-cessful open-air horticulture and poultry farms was over 1. These figures clearly show that it can be possible to achieve at least tolerable profitability levels. Suc-cess requires efficient and professional farm management, as well as favourable conditions. It also requires that the de-velopment of product and input prices and changes in support systems do not cancel out the efforts made by farmers in order to improve their results.

Entrepreneurial income on crop farms

-10 0 10 20 30 40 50 60 70

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017E

Cereal farms Other crop production Horticulture indoorHorticulture outdoor All farms

1,000€ /farm Entrepreneurial income on livestock farms

-10 0 10 20 30 40 50 60 70 80

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017E

Dairy farms Cattle farms Sheep and goat Pig farms Poultry farms All farms

1,000€ /farm

Profitability ratio on crop farms

-0.2 0 0.2 0.4 0.6 0.8 1 1.2

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017E

Cereal farms Other crop production Horticulture indoor Horticulture outdoor All farms

Profitability ratio on livestock farms

-0.2 0 0.2 0.4 0.6 0.8 1 1.2 1.4

Dairy farms Cattle farms Sheep and goat Pig farms

Poultry farms All farms

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017E

Entrepreneurial income and profitability ratio of agriculture and horticulture by production line from 2006 to 2016.

4.3. Overall level of