Supplementary memorandum submitted by
Professor Sir John Marsh
THE RELATIVE ATTRACTION OF SUGAR BEET AND
POTATOES[56]
A GROSS MARGIN
APPROACH
Gross margins provide a starting point to compare
the likely impact of a change in the price of sugar on land use.
Nix shows an average gross margin of sugar of
£1,040 per hectare. This is derived from a yield of 52.5
tonnes per ha and a price of £35 per clean tonne of 17.2%
sugar content. Implicitly this is equivalent to a price of £203
per tonne for sugar at the farm gate.
For main crop potatoes the average gross margin
is £1,025 per hectare, based on a yield of £42.5 tonnes
per ha and a price of £75 per tonne for ware and £12.5
for stock feed.
If we assume:
That potatoes and sugar beet occupy a similar
role in the rotation.
That the relative gross margins shown above are
of an industry "in equilibrium".
That there are no major capital costs involved
in shifting from sugar beet to potatoes.
The impact of cuts in sugar price on gross margin
would be as shown in the table:
| Percentage price cut
| New sugar
gross margin | Relative gross margin
compared with potatoes
|
| 10 | 874 | 151
|
| 30 | 542 | 483
|
| 50 | 210 | 815
|
| 70 | -122 | 1,147
|
| |
|
On this basis there would be an immediate benefit from switching
to potatoes, assuming costs remained constant but sugar beet retains
a positive gross margin until price cuts exceed 50%. Thus if the
fixed costs cannot be avoided, by use for other products, farmers
would continue to produce sugar even in the face of substantial
price cuts.
LIMITATIONS OF
THIS APPROACH
The data set used is old, 2000, whereas reform processes
will not start before 2006. They are figures designed for use
by UK farm managers but even within the UK, let alone the whole
of the EU, would need substantial refinement to present a satisfactory
account of the position facing any one farmer. This means they
give a broad indication of the direction of effect but must not
be confused with a "measure".
Sugar beet produces by-products in the form of beet pulp
for animal feed—so the total return will depend upon the
value of this feed.
The analysis assumes that the costs and returns for each
crop remain unchanged apart from the price of sugar. This is unrealistic.
Costs per tonne will vary with weather, disease and the price
of inputs such as fertiliser and sprays. The price per tonne of
main crop potatoes is volatile.
The analysis is based on average farms but in the "real
world" there is a wide spread of gross margins. Nix gives
a "low" of £695 and a "high" of £1,385
per hectare. The reality is that those who are least profitable
would be likely to abandon production for much smaller price cuts
than the best.
The analysis assumes that beet will continue to find a processor
whatever the volume available in a region. This is untrue. Once
production cuts in the catchment area for a particular beet factory
result in a level of throughput at which the factory fails to
cover its costs, the processor is likely to close. As a result,
even low cost producers will find they have no outlet for their
product and sugar beet production will cease. There is no similar
technical bottleneck for potatoes but in so far as profit relates
to contracts with major retailers or processors, a parallel situation
may occur making it difficult for former sugar producers to transfer
land from sugar production to potatoes.
It is unclear just what proportion of the fixed costs for
sugar and potatoes are interchangeable. Labour and tractors, for
example, could be used for either product. Seed planting, harvesting
and grading equipment probably could not. The more specialist
the equipment the more difficult would it be for a farmer to move
from sugar to potatoes.
A FINAL CAUTION
If we assume that both crops will operate in a "free
market" the vaibility will depend not only on what takes
place on the farm but the competitiveness of the downstream sectors.
For example, there is a threshold effect, referred to above, for
sugar beet processing. Once the volume of throughput falls below
a critical percentage of capacity the process becomes unprofitable
and factories will disappear. For potatoes, the growth area in
the market is in processed rather than fresh product. A similar
"threshold" effect arises. Processing profitability
depends on competitive price of potato raw material, throughput,
actual processing costs and final selling price. Processed prices
are likely to be related to the success of advertisement campaigns.
The imposition of new environmental regulations will also
impact on the costs of production. It is improbable that these
will have similar impacts on sugar beet and potatoes or in the
UK and among its competitors within the EU. How serious this might
be cannot be determined until the new regulatory system is in
operation but past experience suggests that UK governments are
unlikely to be as protective of producer interests as those in
many other EU countries.
March 2004
56
The data used in this note are based on the John Nix "Farm
management pocketbook for 2000." Back
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