MANAGING FARM COSTS COULD BE THE KEY

Over the last couple of months, I’ve shared blogs about understanding your farm profit and profit drivers and managing price and production to drive profit.

In this blog, we’re going to look at managing farm costs to drive profits. Successful businesses are those that have a strong understanding of their costs. As we’ve all experienced recently, increasing costs are often outside our control. If you have a solid understanding of your costs, you’re in a much better position to respond. It will help you ensure rising costs don’t undermine the work you’ve done to increase your profits.

A quick recap of profit and profit drivers

In my recent blogs, I’ve explained how profit drivers are internal and external factors that influence the profitability of your farm or agribusiness.

These include revenue drivers, such as:

• increasing crop yields by improving water use efficiency (WUE) and soil management 
• changing or diversifying your crops or livestock
• improving the quality of your product to sell at a higher price
• finding new markets for your products

When you focus on revenue drivers, you can increase your farm profits even if your costs remain the same.

In this blog, we’re going to look at cost drivers.

Profit drivers affect businesses differently depending on market conditions, farm size and location. They can also vary on a single farm from year to year.

Managing costs to drive profit

Understanding your cost structures and how much you need to produce to cover costs, is crucial for the survival of your business.

Cost drivers can include:

• reducing waste
• using efficient production methods
• negotiating more competitive prices for inputs
• managing the use of inputs such as seeds, fertiliser or fuel

Understanding fixed and variable costs

When looking at your costs, it’s useful to split them into fixed and variable costs.

 Fixed costs are those you incur regardless of the season or how much you produce, including:

• permanent wages
• overheads
• depreciation
• finance costs

 Variable costs are those that vary with the season or the volume produced, such as:

• fuel
• repairs
• fertiliser
• livestock purchases
• supplementary feed
• animal health
• seed
• casual wages
• freight costs
• levies

All businesses have fixed and variable costs. But the seasonal nature of farming means managing costs is even more important. Having the right cost strategies will help you maximise production in the good seasons and minimise costs in the poor seasons.

Focus on fixed costs

Some of these costs might seem like a small percentage of your overall spending, but they can still affect profitability.

Here are some improvements to consider:

Insurance: When was the last time you compared your insurance costs and coverage?

Licenses: Are you entitled to any concessions? Can you pay for 3 or 5 years to reduce the overall cost?

Water, power, phone and internet: When was the last time you monitored your usage or compared your plan? Are you maintaining your water pipes and storage?

Administrative support: Could you engage someone to organise your accounts to save you time? Better organised accounts will reduce accountancy fees and help financial advisors understand your business and make better informed decisions.

Scaling: Could you lease more land to increase production and spread costs over greater output?

Variable costs

Variable costs depend on whether you have livestock, crops or another type of farm business. I’ll share some general thoughts below. But you should definitely chat with your broker, farm advisor or accountant if you want to get a better understanding of your specific costs.

Capital costs – machinery and livestock

When looking at capital investments, it’s important to really consider what your business needs. Ignore what your neighbour is doing (this is not about keeping up with the Jones’). How much you invest in farm machinery depends on the size of your business and what you really need. Always consider the cost of replacing machinery and work out the costs per hectare.

If you’re considering an investment in new technology or upgrading existing machinery, you need to work out how much it will save you or how much it will increase production. That way you can work out whether the cost (over the life of the investment) will be worth it.

Operating costs

If you’re farming crops, there will always be costs. You can’t grow anything without seed. You’ll need to spray and fertilise. And then you have to harvest and transport the produce.

But there are many ways to reduce the costs including:

• Having the right mix of full-time, part-time, casual and contract staff
• Providing adequate training to reduce downtime from mistakes or accidents
• Buying second-hand machinery
• Forming a syndicate to share machinery or buy inputs in bulk
• Leasing more land to lower per hectare costs
• Hiring extra labour so you can use your machinery for more hours
• Providing contract services to others to increase your earnings from machinery
• Finding more efficient transport and logistics operators
• Ensuring you service machinery so it’s working efficiently
• Following spray and fertiliser instructions to only use the required amount
• Regularly reviewing your budgets and plans
• Using technology for more efficient feeding, watering and monitoring
• Monitoring and reviewing your off-farm costs, including transport and storage

Don’t forget your tax and finance costs

Understanding the cost of your finance and tax can make an enormous difference to your costs. It pays to make sure you’re reviewing your loans regularly, especially when interest rates are rising. This is something I help clients with throughout the year.

With tax, you should be speaking to your accountant throughout the year. There’s no point paying too much and getting a return at the end of the year, when you could have been using those funds for something else.

Client story

My clients were keen to tender out their finance to other banks to create some competition for their existing bank. There is nothing fancy to this story – the potential new banks came back with rates 0.6% lower than their existing bank which was a saving of just over $21,000 per year. I provided the same information to their existing bank who came back with similar rates to the other lenders. My clients stayed with their existing bank and have added $21,000 to their profits.

Conclusion

Having trusted advisors you work with throughout the year (not just at tax time or when your loan needs refinancing) will help you stay on top of your costs.

So that wraps up my series on profit drivers. Hopefully, you now have a better understanding of how you can generate profit on your farm by managing pricing, production and costs.

It’s important to remember that while the basics apply across all types of farms and agribusinesses, the profit drivers will be different for every business.

If you have questions or would like some advice specific to your situation, please get in touch.

Over to you

If you liked this article, I’d love you to share it. And if you’ve got any comments or questions, please get in touch.

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