Aberdeenshire Arable Monitor Farm

Andrew Booth

Savock Farm

Foveran

Aberdeenshire

AB41 6BA

February 2014 Meeting Report

Farm Succession Planning N Response Trial Results

Date of next meeting: May 2014

Facilitators: Jim Booth Tel 01651-843607 jim.booth@saos.coop Peter Cook Tel 07774 160246 cooknewton@btopenworld.com

The Aberdeenshire Arable Monitor Farm Programme is an HGCA project supported by

the Scottish Government SRDP Skills Development Scheme.

Meeting Programme:

• Andrews update

• Agronomy Update – Ian Dalley

• Yara Fertiliser Trial results – Jez Wardman

• Market Outlook Update – Alyn Bridgeford

• Fly and a news

• Farm Succession Planning -

1. Andrew’s Update

Andrew’s Comments:

• Farm shop did well over busy Christmas period (our harvest!).

• Approx 35% of sales now coming from internet orders

• Getting a margin from beef is a struggle - £4 /kg is too high

Farm Side

• Sold the last of the old crop wheat

• Set trigger sell price at £150/t

• Committed the Oats on contract – Scotgrain

• OSR on pool with Abdn Grain

• At a € rate @ 82p took 25% cover and locked in SFP.

• Sold old 5-furrow plough at Thainstone - not sure how to replace? Have offers to

plough at £20 /acre or alternatively could buy 2nd hand 7-furrow plough

• New man currently working at Trumps golf course - he is good with mechanics

• All fertiliser bought and home

• Had SFQC Inspection and passed.

2. Agronomy Update – Ian Dalley

Summary:

• Winter crops have never looked better, in stark contrast to the previous year. Never

seen crops so strong, new experience.

• Established early in autumn, good backend growth, no frosts, no snow, no pigeons, etc.

• So a different set of challenges, needs a different approach, so what are you going to

change?

N rates and timing

• With such strong, forward plants what is the impact on total N rate and timing?

• There is more N in the crop itself – measured by the ‘green area index’ (GAI) – ie the

ratio of green leaf area to the area of bare ground.

• There are a range of apps available for mobile ‘phones which use crop pictures linked to

satellite analysis to estimate the GAI.

• Alternatively for OSR, can cut a 1 M2 measure the fresh weight (in kg) and multiplying by

0.8 to get the GAI.

• This is all about ‘Canopy Management’ - a system of tailoring N rates and timings to

optimize oilseed rape canopy size to maximize yield.

• The optimum GAI at flowering is 3.5, with larger canopies having poor light use

efficiency and a greater risk of lodging.

• For example, Andrew’s OSR (Cracker) had 32 plants /M2 X 0.8kg material (weighed) =

0.83 GAI

• OSR takes up 50 kg N/ha to build each unit of GAI, so a crop with an optimum-sized

canopy of GAI 3.5 at flowering contains 175 kg N/ha.

• Uptake is up to 3kgN /day so = 58 days

• Big strong crops have high GAI so can delay N application a bit, towards the end of Feb

(conditions permitting)

• Need to ensure adequate Sulphur

Winter Barley

• Is all about viable tiller number. The yield potential is very high – 12t+ /ha – so its all

about arresting the erosion of yield potential

• Most crops full of disease; mildew, net blotch and

• T0 sprays need good curative active ingredients

• Don’t delay N application too much, probably about 1st week March, ground conditions

will be an issue

• Late sown crops will require earlier N application

• Application of Mn

Wheat

• Seen a move to early sown wheats. Many crops too thick so needed to reduce seed

rates

• Wheat has amazing ability to compensate to build yield so watch not too thick - may

have to try and abort plant tillers this year

• Growth rate applications & mix will be critical this year – need every tool in the box

• T0 sprays need good curative active ingredients

3. Yara Trial Results - Jez Wardman

Yara established a number of trials on the Monitor Farm to investigate the nitrogen response in

winter wheat and winter barley, timing and Source. Also looked at evaluating the role of the N

Sensor and N Tester tools.

The specific objectives were:

1. To investigate the nitrogen response to nitrogen and determine the economic optimum

nitrogen rate.

2. To investigate the response to different splits of nitrogen and see if there was a response to

timing.

3. To compare alternative sources of nitrogen, specifically urea vs ammonium nitrate.

Nitrogen Response in Winter Wheat

Different rates of nitrogen were applied and the yield response measured as shown in

Figure 1:

Figure 1 Nitrogen Response in Winter Wheat at Savock farm

Based on this it is possible to calculate the economic optimum rate of nitrogen( N Opt) at 294

KgN/ha, (based on wheat £150/t and nitrogen 71p/kg)

It is also possible to calculate the following returns: 27.5 kg grain from every 1 kg N, 8.02 tonne

extra yield due to applied nitrogen, £1,321 extra gross return per ha, £1,114 extra net return,

£5.75 return per £1 spent

It is also possible to calculate a nitrogen uptake efficiency (NUE) of 76%

Since this trial was one of a series conducted by Yara last season it is possible to compare the

response across several sites as shown in

Figure 2

Figure 2 Nitrogen Response in Winter Wheat at various locations in 2013

What is striking is the large variance in N opt values at the different sites which ranged from 172

to 294 kgN/ha. This variability in N opt is directly related to different nitrogen uptake efficiency

and is also directly linked to return on investment at the different locations, these data can be

seen below

Table 1 Winter wheat nitrogen response calculations

This variation in nitrogen uptake efficiency is typically caused by a poor interaction between the

soil and the crop root system which may itself be due to a combinations of a compromised root

system, poor soil structure, poor drainage or other factors. This emphasises the importance of

soil structure and principals of good soil management since at the sites where there is a lower

nitrogen uptake efficiency due to the above reasons, there is a much lower return on the

investment in nitrogen.

It is not always easy to observe or measure the performance of the root system below ground in

the growing crop, but observation and measurements of the aerial part of the crop will give a

very good indication of what is happening below ground. This is demonstrated in the case of

Savock farm where crop nitrogen levels were monitored in the trial during the course of the

response trial and are shown in

Figure 3.

Figure 3 Leaf Nitrogen values related to applied nitrogen 13 May 2013

This figure demonstrates the principal that by measuring leaf nitrogen content earlier in the

season it is possible to predict what the optimum nitrogen rate will be at harvest, while there is

still time to make corrections if needed. This is the principal behind the Yara N-Tester which is

able to provide a crops nitrogen recommendation based on leaf N measurements and also the

Yara N-Sensor which is able to variably apply nitrogen based on sensed crop N and so

compensate for variation in crop nitrogen uptake efficiency, ie differences in soil and root

system across a field.

Nitrogen Response in Winter Barley

An identical nitrogen response trial was also conducted in winter barley at Savock and the

results shown in

Figure 4

Figure 4 Nitrogen Response in Winter Barley at Savock farm

In this case the economic optimum rate of nitrogen( N Opt) was 234 KgN/ha, (based on barley

£140/t and nitrogen 71p/kg) which gave a return of £5.84 per £1 spent on nitrogen

Nitrogen Timing in Winter Barley

As part of the nitrogen response trial in winter barley at Savock some treatments also looked at

the effect of timing of nitrogen on yield and the results shown in

Figure 5

Figure 5 Effect of Nitrogen Timing on Yield in Winter Barley at Savock farm

These data show that last season there was clearly a response to varying the split of nitrogen

with benefits from applying a higher proportion early to increase crop biomass and promote

tillering. This effect is dependent on the season and it is likely with much more advanced crops

in the ground this season the opposite may be expected and each crop should be assessed

individually. This is also reflected in the results comparing two different field with South Minnes

receiving an extra early split, as shown:

Figure 6 Effect of Nitrogen Timing on Yield in two fields of Winter Barley at Savock farm

Nitrogen Timing in Winter Wheat

Similarly as part of the nitrogen response trial in winter wheat at Savock some treatments also

looked at the effect of timing of nitrogen on yield and the results shown:

Figure 7 Effect of Nitrogen Timing on Yield in Winter Wheat at Savock farm

On this occasion there was less of a response to timing and an indication of a better response to

the later timing. These data re confirms that each crop should be assessed individually since this

crop was well established at the time of application, however this result will also be influenced

by the fact that the total rate applied to these three treatments was 220 kgN/ha compared to an

optimum of 294 kgN/ha.

Nitrogen Source in Winter Wheat

A separate trial was conducted in winter wheat at Savock to compare two different sources of

nitrogen on yield and the results shown in Figure 8

Yield response to different sources of Nitrogen in Winter Wheat at Savock Farm

This clearly shows the benefit of Ammonium Nitrate over Urea since AN is a much more efficient

source of nitrogen being more readily available to the crop and with less risk of in-field losses it

is no surprise that a higher yield was achieved.

No doubt this also reflects that fact that rate applied by Andrew for these treatments was well

short of the optimum with only 202 kgN/ha compared to an optimum of 294 kgN/ha. Indeed if

higher rates of nitrogen had been applied ( assuming the NVZ Nmax permitted this) there would

have been an even higher response, as shown below:

Figure 9 Yield response to different sources and rates of Nitrogen in Winter Wheat at Savock

Farm

Nitrogen Source in Winter Barley

Finally, there was also a trial was conducted in winter barley at Savock to compare two different

sources of nitrogen on yield and the results shown below:

Figure 10 Yield response to different sources of Nitrogen in Winter Barley at Savock Farm

These data again show the benefit of AN over Urea as a nitrogen source although on this

occasion not as significant as on the wheat.

Comments

The yield response curves to N was much larger than expected. (Note, this is based on one

year’s trial results at Savock, 2013). Andrew’s winter barley (Retriever) had a trial plot yield of

13.37t/ha @ N opt 234Kg N/ha - this would have been the 2nd highest trial plot yield in the UK

for 2013.

What does it all mean? Clearly our winter cereal crops are responsive to N rates beyond the

NVZ regs. With the availability of vari-rate fert. technology, should we be applying higher rates

of N in the good areas, balanced by lower rates of N in the poor areas to comply with the overall

N max rate?

4. Market Update – Alyn Bridgeford, Scotgrain.

2013 HISTORY

Huge min/max price variations in one year – what a lesson in timing of sales to get the best

margins!

Crop £/t range

Malting barley £220 – 145

Oats £220 – 115

WW £200 - 150

OSR £340 - 270

2014 OUTLOOK

Threats:

• Maize – cheap and plenty of it, replacing WW and barley

• Reduction in poultry flock

• 3 crop rule? (maybe minimal effect)

• Over imported maize and WW. Price could drop a lot to shift it.

• Invergordon plant shifted to maize from wheat. Driven by price (and yield of spirit), but

also its up for sale and it is a good time to boost their margins as much as possible.

Wheat more competitive now so hope for switch back.

• Slight blip in whisky makers demand for malt – cant get enough barrels! World not

drinking enough Bourbon! Switch to Cherry barrels and all sorts to allow expansion to

continue.

Wheat – currently £150/t. New crop £140. Two prices will meet!

Rape old crop £280 - £290/t. November £270. Strength of sterling not helping export.

Feed barley £120/t now. Don’t know for Nov.

Malting barley. Where by harvest? £160/t futures based contracts, but very little sold forward

as of now.

Not great price prospects, but end March/ April is the critical time for view on US and European

crops and how they have wintered.

Overall world stock levels are still lower than just 5 to 7 years ago, so the price will be very

sensitive to relatively small shifts in supply and demand.

5. Farm Succession Planning Farm succession planning – the process of transferring ownership and management to the next

generation – is an issue faced by all faming families. It is not easy, many folk are unsure how

and where to start so simply keep putting it off which is the worst thing to do. Another big

challenge is providing for the retiring generation and for any non-farming family members.

Alex Arthur, Director of Tax, Johnston Carmichael – Succession Planning: An

Accountants View

Contact details: Alexander.arthur@jcca.co.uk Tel 01467 621475

Alex has been providing specialist advice on Succession Planning for Johnston Carmichael for

many years. His presentation bullet points are included in the appendix at the end of this

report.

Succession Planning – Peter Cook, 2 Mennie Cooks Ltd

What’s the big problem?

• Sheer capital value of farms – big increase over last 10 years

• It’s seen as a family asset – lot of emotional ties even for those no longer living or

involved on the farm

Three Stages in Succession Planning

1. Decide what you and the family want

2. Work out how to achieve it

3. Equip the successor(s)

1. Decide what you and the family want

• First of all why do you want succession of the farm? Why not sell and divi up the cash?

Explain why you want it to pass on.

• What’s your vision (of your retirement life, of the future of the farm, of the family

relationships)?

• Involve the WHOLE family. Scary, means bringing up a lot of potentially very different

views, but if you don’t get them out now, they could come out later and cause havoc.

Folk need to feel involved/ consulted.

• Start early. Teenagers need a view of the future. Manages expectations.

• Realism v. Idealism is critical. Don’t describe a vision which just can’t be achieved.

2. Work out how to achieve it.

Some key issues to consider:

• The big problem is the capital value of the farm and its properties compared to what it

can actually generate in income.

• Do the sums for your preferred options, building in the tax implications. You’ll need tax

advice at least.

• Incomes from the farm – how many are needed. How do you manage the 2 family

transition i.e. the period when the farm could be supporting 2 generations (especially

smaller farms). Is off-farm income needed, develop new on-farm sources?

• Houses. Always contentious. How many needed for the family? Are surplus houses a

source of capital for settling on those who will not be farming? When do you give up

the farmhouse and let the successor take over?

• Capital splits/ shares. If there are say three siblings, one of whom will take over the

farm which is worth £2M, what do you pass on to whom in terms of capital? If you want

the farm to carry on, then the rule must be FAIR, but not EQUAL. That means the non

farming siblings should get something, but not a third of the capital value. If you went

the EQUAL route then that’s the end of the farm. However, that is a choice. If it is your

desire for all family members to get equal shares then do it – e.g. sell the farm and share

it out.

• Roles. As you retire/ do less, what will your role be? Have you thought what your

responsibility in the business could be, to allow the next generation to develop and take

control successfully?

• Wives/Partners. Working family members partners are often a source of grievance if

not kept in the loop and if they feel that treatment is not equal. Need a transparent

process and ongoing management.

• Big issue for the future will be the disjoint between capital values and farming incomes.

Do we need to find ways to split the ownership of the property from the farming

business? This has tax disadvantages at present, but could make sense for family to

have equity shares in the property while the farming business is run by one family

member perhaps paying a rent. This is happening elsewhere in the world.

• Once you’ve crunched through all this, put it all in a SUCCESSION PLAN. There’s a lot of

power and clarity in writing it down.

3. Equip the Successor(s)

This is a bit which is often neglected. The most important thing you are passing on is a capable

successor! No point in passing on a perfect farm property if the successor is ill-equipped.

Key Points;

• The successor needs to have real responsibility by the age of 30 i.e. buying, selling,

making management decisions, doing the records. Can start with one enterprise to look

after. Older in my view is often too late – 30 to 40 is often our peak!

• Obligatory period away from home. See how other folk do it, see other industries,

broaden your mind, come home with a fresh, independent view.

• Business training – understand a P & L Account and Balance Sheet, get tools for costing

out options, understand marketing.

• Must be involved in doing the “books” and involved in CA/Solicitor meetings

• Financial Independence. Nothing worse than the loon going cap in hand to mum and

dad to get money to pay for his families expenses. Need a salary/ fixed level of weekly

or monthly drawings for living expenses so can have dignity. If the business cant afford

that then the successor shouldn’t be working FT at home. A salary acts as a driver to

make sure that you develop the business to generate it.

• Regular “board” meetings. Especially for farm businesses with several family members,

you need a regular forum where business issues can be fully discussed and everyone can

be part of decision making, also grievances aired. So have a regular “board” meeting /

management meeting like a company would, follow a fixed structure (cover each

enterprise, current financial position, cap expenditure decisions coming up, personal

issues like remuneration/houses etc). Sounds too formal for a small business, but the

alternative can be the build up of misconceptions, grievances. The management

meeting is a good way to build up a successor – they get to understand the whole

business.

Appendix 1.

Alex Arthur’s Presentation Bullet Points

Areas

� Ideas – Ideal Position

� Tax Position

� Actual - Reality

Ideas- Ideal Position

� Treat the family – children – equally

� Allow those in business not to be in debt

� Enjoy retirement

� Have no worries

� Getting it right

Treatment of Family

� All children to be treated equally?

– What if some children well off in own right and others not?

– If all treated equally

– Are there funds to avoid debt?

– If business child has to raise cash

– Can business survive with debt?

– Can business support two families?

(i.e. 2 children and spouses/partners plus their children)

Enjoy Retirement

� Can you “retire” and enjoy life?

� Do you require some income from the business?

� Are there other sources of income?

– E.g. Pensions, savings

– Will you be happy that everything is in order?

– Not just financially

– Family will be happy with your wishes

Have No Worries

� Can you live with your wishes?

– Children all happy

– Concerned with changes/diversification of business

– Concerned with future financial position of business

– Is it in safe hands

Getting it Right

“A goal without a plan is just a wish”

Antoine De Saint-Exupery (1900 – 1994)

Tax Position

� Inheritance Tax

� Capital Gains Tax

� Trusts

� Other Points

Inheritance Tax

� Business Property Relief

– 50% if owned by individual but used by partnership

– 100% if sole trader

– 100% if partnership and owned by partnership

– Covers hope and/or development

– Watch limited companies and assets used for business owned personally

Capital Gains Tax (1)

� Succession

– On death CGT dies with you

– If gifted now will you be able to defer CGT?

– Why raise potential tax liability?

– If no IHT on death (i.e. Covered by BPR)

– If no intention to sell by next generation does it matter?

Capital Gains Tax (2)

� Potential development

– Why transfer prior to death?

– Retain and rent to business? Or

– Stay as a minor profit partner but major capital partner

Capital Gains Tax (3)

� Entrepreneurs’ Relief

– Will you be entitled to it?

– Disposal of whole or part of business

– You need to cease trading?

Tax – Trusts

� Are Trusts still effective?

– Tax rules changed from March 2006

– IHT rate 6% every 10 years

– Why use a Trust?

– Control (children too young)

– Security (business not profitable)

– Unsure of who to inherit

Tax – Succession

“But in this world nothing can be said to be certain, except death and taxes”

Benjamin Franklin in a letter to Jean Baptiste Leroy (1789)

Actual Reality

� What does each family member really want?

� What is achievable?

� Balance wishes with tax position

� Compromise by the family

What Does Each Family Member Really Want?

� Have you asked them?

– Do they really tell you

Or

– Do they say what they think you want to hear?

� Have you really listened?

Or

– Have you heard what you want to hear?

– Will you accept that the family may want different things?

� Will you consider all their wishes/thoughts?

What is Achievable?

� After listening

– Let them know your position

(e.g. Only asset is the business)

– Let them know your wishes

(e.g. Retire at 70 – fully)

– Discuss the possibilities

– Go away and think about it

– Discuss with individuals

– Discuss with family

– Make a decision

– Tell the family and see their reaction

Balance Wishes With Tax Position

� Does the tail wag the dog?

� Tax may play a big part in decision

– Should not override wishes

– Will the family accept some tax is due?

– Some tax planning may require action by others at a later date

– Are you happy that this might not happen?

– Will family be happy to wait for another day?

Compromise by Family

“When you have given nothing, ask for nothing”

(African proverb)