Weigh business risks as costs grow faster than profits
Author: Tristan Price | Date: 09 Dec 2013
The costs of growing grain in the southern cropping region don’t look like falling any time soon, meaning farmers and business managers need to be mindful of keeping farm expenses in check.
ORM Agricultural Management Managing Director Phil O’Callaghan has told Grains Research and Development Corporation (GRDC) Farm Business Updates that the costs of production are increasing more rapidly than the value of their production, putting more financial pressure on margins and profits.
“It’s a credit to the cropping industry in that profits have actually been maintained through that time when some costs have risen by up to 100 per cent over the last 10 years,” Mr O’Callaghan said.
“We had a look back at trends over the last 30-40 years and there is a trend of increasing costs. This is partly due to increases in unit cost of crop inputs and machinery but also to the increase in farm scale and crop intensity. Going forward, there doesn’t seem to be any reason why the trend of increasing cost of inputs would change, hence if crop intensity and farm scale continue then we need to accept that the cost structures of our businesses are increasing.
“Costs are increasing at a faster rate than the actual value of our commodities we’re producing, so when fine tuning the operation and profitability of the business, the challenge for inpiduals is to decide whether they should continue to produce more tons at tighter margins or should they review inpidual farming systems with a view towards reducing whole of business costs.”
ORM surveyed 32 farms across the Wimmera and Mallee regions of Victoria and found in general that the growth in cost pressure had far outgrown commodity value. For 14 farmers from the Mallee that took part in the analysis, production costs had doubled over the last decade, while profitability had remained at around the same level.
Mr O’Callaghan said businesses that manage costs in conjunction with income volatility have the opportunity for strong business profits.
“The challenge we’ve got is that rising costs then results in higher financial risk to the business. Currently, profit potential is managed by applying new technologies to increase farm scale and improve efficiencies overall, however, when whole of business costs are high and income is variable due to Australian seasonal volatility, then large financial losses occur in some years.”
To see a video interview with Phil O’Callaghan on farm business risk management, visit youtube.com/theGRDC or watch the video below.
To learn more about business risk in the southern cropping region, see the Farm Business Management Fact Sheets at http://www.grdc.com.au/factsheets.
Caption: ORM Agricultural Management’s Phil O’Callaghan urges southern cropping region grain growers to be mindful of business risks as production costs continue to grow faster than profits.
Phil O’Callaghan, ORM
03 5441 6176
Tristan Price, Porter Novelli
03 9289 9555
GRDC Project Code ORM00001
Region South, North