Using the farming system to mitigate risk and profiting from the outcome

Introduction

Who knew building a more robust farming system could help manage risk and stimulate more profitable outcomes more often?

The answer is those who have taken the bold steps to thoroughly evaluate what they are doing and ask the serious question of why.

Twenty-five odd years ago a step wise change in agriculture was caused by the loss of the floor price scheme for wool. This forced many to confront the need to investigate their farming system going forward. The concurrent emergence of minimum tillage and later no till made the move to more cropping orientated businesses the simple solution.

Today the background risk factors of ongoing cost-price squeeze, increasing farm debt and a more volatile climate both in terms of seasonal conditions and the broader political landscape, even when only considering their influence on commodity pricing it is putting farm businesses under mounting stress. In many cases, add to that on-farm politics of inter-generational change and the long run of adverse seasons which when all combined makes forward progress a real struggle.

With no easy options apparent this time round, the challenge is to open up the business and genuinely look at the fundamentals of the farm business beginning with the farming system.

This can be an internal process however the review generally benefits from an outside perspective to help take the farm operator out of the day to day business to a more whole farm view.

Some farming system fundamentals need to be asked; is the business built on sound principles that are designed to:

• Achieve the goals and objectives of the business owners/operators;
• fit within the environmental constraints of the farm’s location; and,
• match not only the physical resources, but also the financial and human resources of the business.

Within the chosen farming system is there a balance of enterprises and a ‘complementary diverse’ rotation that affords a degree of flexibility and by its design, promotes risk mitigation.

A complementary diverse rotation simply means a rotation where synergies accumulate from one phase to the next e.g. exploiting the differences between broadleaf and cereal crops to apply different pest management strategies and/or utilising legume species to generate ‘free’ nitrogen for the following crops. Consider the savings to the crop enterprise of 200+ units of nitrogen generated under pasture. This not only enhances profitability but also reduces exposure to financial risk in a poor season. Diversity also helps counter risk factors associated with weather via for example, the spread of sowing and harvest times and price risk via for example non-price linked products such as barley and canola.

There are a large number of financial indicators to assess your business’s health, wealth or exposure to risk for example calculating return on assets, equity, and debt to income ratio. I could give some rules of thumb measures for these indicators, however to be specific to your business you should ask a ‘qualified’ accountant, financial adviser or consultant who knows your business or agribusiness in your area. In the long run however, these are just numbers unless you utilise them to trigger actions or change in your business.

As a quick farm business health check you should ask yourself the following; in the last 10 years:

• How many years has the business recorded an operating profit large enough to pay all living expenses and allow for debt reduction? Has it been seven or more years?
• Is the level of total debt (including money owing on machinery and/or livestock) higher or lower, on a per hectare basis?
• How much wealth has been added to the balance sheet via capital gain and/or operating profits?  Is it enough to move forward with confidence or feel comfortable handing the business on to the next generation?

Too many within the industry are still reliant on standard gross margins which only account for around 40 per cent of costs. To genuinely assess an enterprises’ worth, a full cost of production analysis needs to be undertaken, right down to drawings and adding a desired profit margin.  

Review the business annually, not just financially but also the productive outcomes. Drill down to why canola yields were down; were they sown dry on paddock(s) with a low soil moisture profile or did pest, disease or frost play a part. Similarly, with the livestock enterprise(s); how much income was generated for the area grazed and how much of that was profit. It is not hard to recollect a case study where the livestock enterprise occupied 50 per cent of the farm land, produced 23 per cent of the revenue but only 10 per cent of the profit. This was obviously unsustainable in the long term and in this particular example, management took steps which involved a hard look at their genetics, birth percentages, product quality and quantity per hectare, grazing management and turn-off times. This ultimately led to a ‘rewarding’ change in breed where the sheep enterprise occupied 40 per cent of the farm land, generated 35 per cent of the revenue but importantly 50 per cent of the profit. The moral of this story was ‘don’t just run sheep, manage a ‘defined’ sheep enterprise.’

Whatever drives the desire/need to change, whether it is an under-performing enterprise or new blood in the farm team, ensuring critical evaluation of the new direction or innovation is essential. In this day and age of unfettered access to sources of information, care should be exercised in taking claims at face value. Be open to ‘new’ ideas but filter sources for accuracy and relevance to your situation.  

By all means strive for the leading edge, but be wary of the bleeding edge of innovation where you’re the guinea pig spending the money to test the next ‘big thing’ in agriculture. If you can’t afford to lose, look to take advantage of the latest but fully tested best practice principles that fit your business.

Genuine independent advice is hard to find, but seek it out. Do your due diligence and ask yourself:

• Is this ‘new machine/product’ going to lift productivity e.g. reduce costs such as time or labour requirements or replace/improve an existing input?  
• Is it cost effective when tested against alternatives and your own standard practice; and by incorporating it into your budget projections (short and longer term)?  
• What’s your strategy to pay for it? If necessary, how will you convince the bank to lend you the money?

Can you minimise the risk of change by phasing it in, in a manner that reduces large swings in income or costs? In the field, test new products against your current system using trial strips or half paddock comparisons and monitor the results. The ultimate test is improved yield established by accurately yield mapped paddocks.

A key foundation stone in all of this is an ability to maintain flexibility. Don’t put all your eggs in one basket and have a plan B if seasonal or other factors indicate the need for an alternate strategy. If weather conditions or weed issues indicate a crop is unlikely to finish or will be swamped by weeds then consider hay production.

Having said all that; you must fundamentally believe you can achieve change in order to profit from it. Managing production and price risk means financial pressures will ease and you should be able to take a holiday, which will hopefully help manage your own and your family’s risk factors.

Contact details

Peter and Hazel McInerney, 3D-Ag 

52 Fitzmaurice Street, Wagga Wagga
0428 317 746
more@3D-Ag.com.au