Managing price and production to drive profit.

In last month’s blog, we covered some of the key elements to help you understand your farm profit. In this blog, we’re looking at the first 2 profit drivers – price and production.

You already know that maximising profit is a key goal for your business. There’s a misconception that decreasing costs is the first thing you should consider. As we saw last month, it’s often more effective to increase revenue to increase profits.

A quick recap of profit and profit drivers

Net profit is your gross farm income less any costs.

Farm income can include:

• commodity sales
• contracting
• other revenue produced by the farm.

We don’t include grants, insurance recovery or sales of assets.

In this blog, I’ll explain how increasing prices and/or production can help increase your farm income. We’ll come back to costs next month.

Understanding revenue drivers

Revenue drivers are the factors that increase your farm’s income, such as:

• increasing crop yields by improving water use efficiency (WUE) and soil management 
• changing or diversifying your income (contracting, off-farm, change in entity or more efficient use of labour)
• improving the quality of your product so you can command a higher price
• finding new markets for your products

Having reliable and diverse income is one of the major drivers of profitability. By focusing on these, you can work towards achieving consistent farm profits.

Managing prices to drive profit

For most businesses, increasing prices has the largest impact on profit. This is because it injects increased cash flow into the business as profit (after paying sales commissions or levies).

As an agricultural producer, you don’t have the option to set your own prices. The market sets the price for grain and livestock. It’s affected by global and local demand and supply, and as we’ve seen recently, agricultural commodity prices can be volatile.

Producers need to prepare to withstand price changes due to:

• impact of weather on production (and thus supply) here and overseas
• exchange rates
• global political unrest

To improve your farm profits, you need strategies to manage market price increases and decreases.

Marketing strategies to manage price risk

Having an informed commodity marketing plan is a crucial element for managing prices. Your plan should cover business cost structures, expected production volumes and seasonal influences.

This will help you set the best price (or range of prices) to aim for when selling your products. By having a solid marketing plan, you can make the most of the opportunities as they arise. For example, when global production uncertainties cause sudden price increases.

To get the best results, get professional support to learn more about marketing plans.

Tips to help you get the best price for your product

Here are some other suggestions to help you get the best prices and improve your profits.

• Track local and global markets to find opportunities to sell at higher prices.
• If you’re confident you can deliver, forward sell your product to lock in a more favourable price.
• Get financial advice on using derivatives such as swaps and options to manage price risk.
• Look for opportunities to sell direct to consumer to avoid extra supply chain costs.
• Look at options to produce premium products that you can charge a higher price for. This might include blending grain, switching livestock to being grass fed and optimising the yield/protein relationship.
• Target niche markets that will pay a higher price.
• Sell your product over a longer period to average out the cost.
• Develop a recognisable brand with distinct attributes so you can charge a premium
• Research markets to see if you could sell at different times for higher prices. You might need to alter your production schedule. You’ll also need to consider any extra costs or reduction in yield this might have.
• Hold stock during periods of lower prices. You need to weigh this option up against the extra cost of holding stock. There could also be costs from not having that income to use or invest.

These are only suggestions. You should discuss the best options for your farm or agribusiness with your financial and business advisors.

Managing production

The second profit driver we’re considering in this blog is production. Options for changing how you grow crops or raise livestock vary from business to business. Here are some options you could consider exploring with your trusted advisors.

• Utilise software to manage production based on seasonal conditions and outlooks.
• Invest in new technology to improve disease resistance and water-efficiency.
• Use water, fertiliser and pesticides more efficiently.
• Consider soil improvements, such as lime and gypsum, to increase productivity.
• Manage product quality to avoid penalties, reduced prices or product rejection.
• Diversify production and sources of income on your farm. That way, if there is a large reduction in the price of one product, you’ll have alternative income streams.

Client story

I have several clients that have low-lying land that has been severely affected by frost events. They’re all adopting strategies to increase livestock numbers. By doing this, they can reduce the area they crop on frost prone paddocks. They’ve invested in fencing to separate the frost affected paddocks to maximise cropping areas. Forward planning shows significant increases in income because of these changes.

Conclusion

How well do you understand your pricing structure and production costs? Do you have a marketing plan? When was the last time you changed your pricing structure or reviewed production?

Next month, my blog will look at how you can manage your farm costs to drive profit. If you have any questions, please get in touch.

Over to you

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