$$ And Sense by Jeremy Hutchings* Are your costs too high compared to long-term average income?
PROFITABLE FARMING systems ideally require reliable income with balanced operating, machinery and financing costs. Managing costs relative to a realistic income target provides an effective strategy to ensure that profits are not eroded where costs are not in balance, or income targets are too high.
Seasonal variables such as rainfall, temperature and disease override the benefits of extra inputs in up to 50 per cent of years. In these years extra inputs result in higher costs and lower profits.
Income is the sum of production and price, and can be measured as $WUE (dollar water-use-efficiency, or farm income per ha per 100 mm rainfall). Full production is often not achieved due to limiting factors such as rainfall (see graph), soil type, climate (frosts), timeliness of operation, weed competition (herbicide resistance), crop type and marketing. Some limiting factors can be controlled, while others will override our best intentions.
Comparison of income, profits and rainfall
To manage business profits and losses, it is essential to ensure that realistic income targets are established for the business, and costs are managed relative to these targets.
Your specific combination of limiting factors determines your achievable production targets. Recognise your limiting factors when setting realistic income targets. Use your long-term average income as a guide.
To achieve balanced cost structures, O'Callaghan Rural Management recommends that costs be set as percentages of long-term average income. Some guidelines are provided below, with a 12-year average comparison to the performance of a group of Mallee farmers.
|% of realistic farm income||Mallee average||Mallee top 20%|
|Overhead (or fixed) costs||10||10||9|
|Variable (or farm input) costs||28||27||24|
|— livestock husbandry||1||1||0|
|Machinery operating costs||30||34||26|
|Plant purchases (less sales)||12||15||14|
|Repairs & maintenance||6||7||5|
|Contractors & plant hire||3||2||0|
|Financing — interest and land lease||7||9||4|
|Living and labour||15||13||15|
|Equity growth e.g. debt reduction or business growth||10||7||22|
It is important to note that these costs do not necessarily imply lower costs per hectare.
The comparison indicates that the top 20 per cent of Mallee farmers are achieving significantly lower costs structure relative to income, resulting in 15 per cent higher growth in equity — highlighting the importance of getting the balance right.
* Jeremy Hutchings is an Agricultural Consultant with O'Callaghan Rural Management, Bendigo, Victoria, 03 5441 6176; firstname.lastname@example.org