The old saying “production is vanity, profit is sanity” is very profound today.
Production might make us feel good temporarily but profit will pay the bills and help us sleep at night.
Certainly, the odds of making a profit this season have improved considerably over the past month with the forecast farmgate milk price increasing by 50 cents a kilogram of milksolids to $4.75 plus dividends where applicable.
But, if you think back to the good old days of $7-8/kg MS, making a profit was actually quite easy.
And while the payout seems far less gloomy than it did at the start of the season, it’s still a challenging time and a lot of farmers will be looking at a third year of losses.
Too often we hear farmers talking about their increased production or the amount of milksolids they do per cow, with very little awareness of how their production is contributing to their bottom line.
Production does not necessarily equate to more profit so farmers need to start talking more about cost structures relative to their production levels.
Farmers need to be looking at their whole farming system and evaluating if it is still the most profitable system for the farm’s future.
Whether you operate a low or high-input system or somewhere in between, it’s about making sure that every dollar spent is contributing to the overall success of your farming business.
Farmers need to be looking at their whole farming system and evaluating if it is still the most profitable system for the farm’s future. Every farm is different and every person’s farming philosophy varies so no one system fits every farm.
Variables such as the stocking rate, the quantity and cost of bought-in feed, the overall farm working costs, labour requirements, the farm infrastructure and of course the milk price, just to name a few, can significantly affect your bottom line.
A sensitivity analysis takes these variables and compares different scenarios.
For example, buying in 100 tonnes of feed versus 300 tonnes of feed will achieve different production levels.
A sensitivity analysis will compare these scenarios and identify the profit or loss on a variety of milk prices.
Farmers can then make informed choices as to what system is best for them and their farms, keeping in mind their own personal farming philosophy and goals.
An analysis like this can be quite eye-opening with the lowest production system not always equating to the lowest profit system.
It is about recognising that every farm is different and the cost of production is critical when evaluating your system.
Alongside reviewing profit and production, now is also a good time to review how well your business is positioned to take advantage of the low interest rates and stock prices – an opportunity to progress, whether that’s getting a foot in the door or expanding.
So how do farmers position their businesses to seize opportunity?
Progression is about good planning, goal-setting, making wise decisions and being able to recognise a good opportunity when you see it. Such opportunities are often unexpected so it is critical to be in the right position to seize them.
Number one is to use any extra cash from good years to either pay down debt or increase savings where there is no debt, helping grow equity faster and delivering a better financial position for progressing.
Another trick to grow equity is by buying assets that will make the business money rather than depreciating quickly. Running financial scenarios for each option can help in evaluating what will be most beneficial for the business.
And, given that more often than not, progression involves taking on more debt – nurturing relationships with the bank is so important.
That means being open and honest, giving managers regular updates on the financial position and regularly paying down debt to demonstrate a robust business and a finger on the pulse.
Finally, build reputation.
Progressing in the rural sector can be tough but a good reputation can make it easier and opportunities will often follow a farmer with a good “brand” rather than having to seek them out.
So maintain a high level of integrity at all times, whether communicating with local contractors, managers, suppliers or sharemilkers.
- Accounting firm BDO Taranaki specialises in rural business advisory services and its rural experts write a monthly column on financial issues affecting farmers.
