Profitability of farms on the rise

The profitability ratio of agriculture and horticulture has improved from the weakest result of the 2000s, approximately 0.26 in 2016, to 0.38 last year, according to the profitability accounting of the Natural Resources Institute Finland (Luke).

The annual entrepreneurial income increased to some EUR 16,000 per farm. The average return on total assets still remained negative at minus two per cent, said a Luke press release.

In 2017, the gross revenue of agricultural and horticultural enterprises grew by some 3.2 per cent to EUR 155,400.

Subsidies made up 33 per cent of the gross revenue. Meanwhile, total costs decreased by 1.2 per cent to EUR 179,700. Of the cost items, the cost of fertilisers experienced the largest decrease (-12 per cent), while fuel costs increased the most (18 per cent).

“The changes of the cost items are not only due to price changes – usage volumes may also have changed,” explained Arto Latukka, the senior scientist in charge of Luke’s profitability accounting.

Entrepreneurial profit, i.e., the difference between the gross revenue and the total costs, still remained negative at approximately minus EUR 24,500. To reach a zero result, the sales revenue and/or subsidies should have been that much higher or the costs should have been that much lower. In such a case, the gross revenue would have been enough to cover the production costs.

“With the costs of entrepreneur families’ personal labour and capital excluded, the average annual entrepreneurial income per enterprise was EUR 16,000. The entrepreneurial income grew by up to 42 per cent from the rock bottom of 2016. As the entrepreneurial income is low, even minor changes in gross revenue and costs can shift it,” Latukka said.

According to Latukka, the EUR 16,000 entrepreneurial income is enough to provide the entrepreneur family’s equity an interest of 1.3 per cent, and the compensation per working hour is EUR 6.2. The profitability ratio was 0.39, which means that the compensation was 39 per cent of the target level of 3.44 per cent interest on equity and EUR 15.7 compensation per working hour. If the entrepreneur ordered the work from a hired employee, the costs – including add-on costs – would amount to the target level of EUR 15.7 per hour.

The profitability ratio of sheep and goat farms and mixed-production farms remained at approximately 0.1 and the profitability ratio of greenhouse enterprises was approximately 0.95. The profitability ratios of grain, open-field production and dairy farms increased to 0.23, 0.65, and 0.46, respectively. The profitability ratio of other cattle farms increased to 0.51 and the profitability ratio of pig farms increased to 0.77. The profitability of poultry farms is currently experiencing a major decrease, but this annual fluctuation may be due to the fact that the sample does not include a large number of poultry farms.

The equity ratio or the ratio of equity to total assets was 72.3 per cent in agriculture and horticulture. Grain farms, farms cultivating other plants and mixed-production farms avoided taking out loans, and their equity ratio was approximately 80 per cent. The equity ratio of greenhouse enterprises and poultry farms was 40–50 per cent, and the equity ratio of dairy farms was some 64 per cent.

“Investment aids are included in equity, which means that they improve the equity ratio, but also increase depreciation costs. An amount corresponding to the depreciation from the investment aid is annually entered as income. Hence, the depreciation due to investment aids does not deteriorate the entrepreneurial income,” Latukka added.