Thursday, March 28, 2024

Stick to the plan once homework’s done

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When it comes to managing risk and creating resilient farm businesses, Canterbury-based farm consultant Jeremy Savage says do your homework and then stick to the plan.
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Savage told the South Island Dairy Event’s BusinessSIDE workshops that having a well-researched pathway to achieving goals was the first step but identification of risks to that pathway should be thorough.

He quoted business author Jim Collins, whose book Great by Choice looked at companies that had achieved 10 times the growth of their competitors. Collins found the successful companies, dubbed the 10Xers, didn’t make bolder moves or have more raw confidence than their competitors. But they’d “done the numbers more thoroughly” when it came to making decisions. That gave them more confidence which in turn helped them to stick to the plan and not get side-tracked.

Dairy farmers should aim to find the sweet spot where the mix of management capability, cow potential, and farm and environmental risk factors were minimised, which was where profitability would be maximised.

“Once you’ve found that sweet spot don’t be distracted by payouts, fads or technologies,” he said.

“Your farm programme in a high payout environment should be the same as your practice in a low payout environment. Both should have the lowest costs of production.”

Some types of risks were:

Management risk

The onfarm management capacity.
Ability to monitor and control.
Disciplines of management to stay focused every day.
Keeping it simple.
The X factor – the ability to read signs such as animal signals of health or hunger.

Production risk
Cow potential
Current cow liveweight.
Realistic lactation length.
Genetic potential of the herd.

Farm and environment

Pasture grown and harvested.
Irrigation – reliability and system.
Stocking rate.
Nitrate leaching.

Larger farms had increased risks with human resources in terms of staff turnover, health and safety, and their ability to put the operation of the farm management plan into action.

Farmers were moving into increasingly turbulent environments of outside influences and risks, such as volatile commodity prices, so systems resilience had become even more important. Resilient farming businesses were those that could withstand change and volatility and maintain productive capacity in the face of that ongoing variability. They could stick to the plan.

Both the resistance to any disturbing forces and the rate and degree to which the business could recover would determine its resilience.

Savage said a characteristic of the 10Xers was that they remained hypervigilant to threats and changes in the environment even when all was going well. They assumed conditions would turn against them but channelled their fear into action by preparing, developing contingency plans, and building safety buffers.

Setting profit expectations and knowing break-even thresholds gave tangible numbers to the strategy, with cost of production and debt having significant impacts on business resilience both individually and when combined.

Total debt/production is commonly used as the measure of indebtedness but it can encourage people to increase production to get the ratio down.

“If this is bought production with supplements and increasing your costs, you are kidding yourself and your bank manager,” he said.

Low interest rates recently had installed a false sense of security and Savage encouraged farmers to run a sensitivity analysis on the cost of interest at 7% and 8.5%.

Typically he saw debt at $16-$20/kg milksolids (MS) but was aware of levels of up to $24/kg MS.

Higher production costs added even greater risk to businesses with high debt structures. At $16/kg MS debt and 8.5% interest, the payout would have to be $6.71/kg MS to break even. If farm working expenses were $5/kg MS, adjustments for depreciation, drawings, and stock income would put costs at $5.35/kg MS.

If farm working expenses were $4.30/kg MS and total costs, with adjustments, were $4.65/kg MS, the same debt level and interest rate would require a payout of $6.01/kg MS.

At a debt level of $24/kg MS and 8.5% interest rate the $5/kg MS farm working expense system would require a break-even payout of $7.39/kg MS.

Farmers should challenge their spending on a daily basis and work on getting staff into the same mindset. Savage said they should evaluate big ticket items carefully, get into the habit of shopping for the best price, and challenge the advice from suppliers of inputs.

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