What Makes a Profitable Farmer
Managing a farming business in a sustainably profitable manner, requires a large variety of skills, a strong work ethic and professional mindset that strives for excellence. Being able to manage conflicting interests, while focusing on optimising business performance and minimising risk, are not unique to farming businesses. However, the requirement to manage variable environmental conditions, large working capital requirements, plus external economic factors, make profitable farm management more complex than most small-medium businesses.
While farming is still a lifestyle which most clients wish to maintain, many farming businesses are now very large, complex businesses, with much more focus required on the management of the business, rather than solely on operational and production decisions. Currently the average RMS client is now managing tens of millions of dollars’ worth of assets, while turning over millions of dollars each year. This has necessitated that decisions are made in a professional and diligent way, as the consequences of poor decisions can have very large financial implications. Thus, farm managers need to consider themselves first and foremost as business people and then farmers.
Clients who manage business decisions well, generally apply the following:
Investment decisions are made on a predicted return on investment for each item, with priority given to those with the greatest return, not withstanding reliability. Rarely does the cost of a seeder, colour of a header, roof over stockyards or bloodline of a ram, increase business profitability.
Managing cashflow or tax liabilities seldom dictates strategic decision making processes, rather the long term benefit to the business is the primary factor considered.
Identify risks to the business and implement strategies to minimise them, while maintaining productivity.
Have a long-term outlook, which may add additional expenditure or reduce income initially, for a predicted greater benefit in the future. An example of this is where clients have chosen to pay Stamp Duty on a land title transfer into a trust, for greater certainty of future control, plus minimise potential CGT liabilities.
One key attribute that the most successful farmers at improving their net wealth have employed, is to consistently expand their business. This has allowed them to take advantage of capital growth, particularly in the last five years, plus dilute overhead costs through increased economies of scale. In addition to this, as businesses expand, scale improves the return on investment from new technology, machinery, or infrastructure, which can further improve operational efficiency such as a self-propelled boomspray, additional labour units, variable rate actuators on existing equipment, or bulk grain storage facilities. If expansions are done progressively on a moderate scale, the additional production should allow the business to support the associated interest cost. As the business grows, each new parcel purchased, is a smaller percentage of the existing business.
Growers who can make good assessments on how decisions will affect their business, are those who are passionate about business management, or who manage their own cashbook and code transactions regularly and accurately. This allows them to have a very good understanding of the business’ financial position and witness first-hand, the affect that decisions have on the business financially.
Growers also differ in their approach to production decisions, both strategically and operationally. As a result, they achieve significantly different financial outcomes. Strategies which the most profitable farmers employ, include focusing on their own business rather than comparing themselves to neighbours, having realistic income expectations, focusing on achieving maximum economic production and having a long term outlook.
Every business, every farm is different, with differences in financial reserves, labour availability and skills, soil characteristics and rainfall reliability. This makes it very difficult to compare one faming business to another. Therefore, decisions or practices which one business implements successfully, may not be appropriate for another. Networking between growers can be a very good source of knowledge, however being able to objectively analyse these differences between farm businesses, prior to implementing practices which other farmers utilise is important.
Expenditure has a habit of rising to meet income projections, particularly when whole industries are performing well. Inflation of input and equipment costs can exacerbate the rise in costs as has been evident in the last few years. Those who set realistic production projections and target inputs accordingly, maximises their chances of achieving maximum economic production. This reduces the risk of overspending in a season when income is less than budgeted, resulting in a cash deficit.
Strong businesses also often develop long term, mutually beneficial relationships with key stakeholders. These can include customers, input suppliers, service providers and professionals. As the supply and demand for agricultural products and inputs varies greatly, the power balance between stakeholders also varies, leading to large swings in price and service. If long term relationships are developed, particularly with customers, when demand reduces or product qualities are downgraded, those same customers are still willing to purchase their product. Additionally, service providers generally provide better customer service to larger, loyal customers, who regularly purchase their products and pay their bills on time. A current example of this is when a new sowing tractor broke down, the machinery supplier provided a replacement tractor free of charge, plus drove hundreds of kilometres to collect parts when couriers were not quick enough. This service is unlikely to have been provided if the grower had not purchased all their key plant from the one supplier. The key benefit from long term relationships is that over time, the benefits accrue through reduced fluctuation of prices, better service and potentially reduced marketing costs.
Operationally, those growers who have good control over business logistics and manage their time well, operate more profitable businesses. With good logistical management, timeliness of operations is improved, which has been proven to increase productivity. It also makes farming less stressful, as potential problems are identified early and can be remedied prior to causing a delay in time-critical operations. An example of this is conducting seeder maintenance at the end of the previous sowing, not just prior to the start of sowing. Therefore, maintenance is conducted when there is recent knowledge of any issues that occurred in the last season, allowing for parts to be delivered during the off season, if they are not immediately available. This can also allow the business to capture opportunities, such as providing contract work for neighbours prior to or post the normal window of operations, because equipment is ready to use.
Growers who have a high level of attention to detail and are continually questioning the status quo with the aim of constant improvement, are those who have made the most gains in productivity and business sustainability. This is through testing and critiquing the decisions they are making, with many using on-farm trials and only making modifications to their production system, if the results are favourable. This has led to an increase in productivity or reduction in costs and risk of negative impacts from production system changes or technology investments. One common example of this is deep rippers, which are very expensive to purchase and operate. Without hiring a machine and doing test strips, it can be very hard to determine if there will be an economic response to the investment in each soil type farmed.
Clients who can identify issues that may arise and are able to put measures in place to limit the impact on the business, generally face less issues in subsequent seasons. These solutions may incur an upfront cost far in excess of the economic impact in one season, however will lead to reduced impacts in the future. A good example of this is herbicide resistant weeds, with those who identify their presence early, able to minimise their spread and impact through sound firebreak management, cutting hay, or fallowing of problem areas.
The adoption of new technology and the utilisation of the full capabilities of that technology to increase input efficiency, set many clients apart. For example, many clients have access to yield maps in headers, variable rate capable fertiliser spreaders and seeders, EID livestock tags, however few utilise the full capabilities of these technologies. Those who do, can save tens of thousands of dollars’ worth of inputs or allow better decisions to be made to improve productivity.
Running a profitable and sustainable farming business is challenging, when managing volatile economic and environmental conditions. However, growers with a strong work ethic which is focused on logistics management, with the ability to critically analyse their strategic and operational decisions, operate more profitable businesses over time. This is through better investment decisions, dilution of fixed costs through economies of scale, less downtime, plus a focus on long term objectives. Everyone has different skills, abilities and resources, therefore the use of a farm management consultant such as those from RMS, can provide clients with a thorough understanding of their business’ financial position, strengths and weaknesses, plus allows the discussion of strategic and operational decisions with a third party, who understands the business.