07 December 2020

Production per hectare or profit per hectare

LIC FarmWise® Consultant Regan discusses profit, farming for the future and how to ensure you manage your costs effectively.

One of my main goals for my clients is to begin changing the conversation that we have from production to profit. Don’t get me wrong, I like seeing cows come in full of milk just like the next farmer but what is it costing us to do so and are we getting the best return on investment?

We reference production on the daily because it is the easiest measurement of what is happening on farm and whether we like it or not, talking about how much money our farm makes is a topic not often talked about. I’m working with farmers at either ends of the spectrum in terms of farm systems and can see there are some very profitable businesses regardless of the system you choose to operate.

Regan FarmWise headshot October 2020

Profit per hectare

For the 2018/19 season, average operating profit for owner operated dairy farms was $2,154/ha with 9.3% of farmers making over $3,500/ha operating profit (DNZ ES 2018-19). Are you in this category or do you want to be?

Cost control

For farmers to attain results like these there has to be strong cost control, average Farm Working Expenses (FWE) were $4.25/kgMS for the 2018/19 season and the top 25% of farmers have these down to $3.86/kgMS ( Dairy NZ Economic Survey 2018-19). How do you compare to this? Now that we know what the final payout for the 19/20 season is, there is a good opportunity to evaluate where you have gone above budget and where you have managed to pull back some cost.

Bought in feed continues to be the highest cost to the farm at 28.5% of few (DNZ ES 2018-19). Are you being up sold on products you don’t actually need? Have you had a second opinion on what you are buying or just what the sales rep has advised?

Do you and your team have all the basics right or are you using purchased feed to hide some of the underlying issues? I do want to help. FWE at $4.25/kgMS are only $0.08/kgMS lower than what they were in 2013/14 when we received a payout of $8.40/kgMS. Is inflation driving these costs up or have some slipped through the cracks? It is worth reviewing these numbers.

After all, you are running a business that is worth multiple millions of dollars and generating surplus cash where possible can go to loan repayments, reinvestment, children’s education, future-proofing your business or spending more time with the family? A few cents here and there can accumulate rather quickly.

Pasture image FW

Farming into the future

With agriculture continuing to be at the forefront of industries requiring change, we must evaluate our businesses and identify whether there is any opportunity to increase profitability that doesn’t stem directly from an increase in production.

Our stocking rate contributes the greatest portion to leaching losses which considerable investment is being made by government organisations to improve the modelling of these metrics (Overseer). Some clients and no doubt many of you have been able to reduce cow numbers and either maintain or increase total production from either better allocation of feed resources and/ or strategically culling those that are consuming feed for the more efficient converters.

These farmers have also seen increases to their bottom line as there has been reductions in, animal health, repro, shed expenses, power, grazing, relief staff and more. Slightly more time in the day has made space for assessing budgets, pasture walks or simply just having a rest so they are refuelled for another hard days’ yakka but having a fresher set of eyes to identify and resolve issues before they have larger repercussions.

The more discussion we can have around profitability of our current systems, the better understanding we have of our businesses which allows us to be proactive than reactive. Knowing our breakeven thresholds and at what stages we can capitalise on higher payouts. Using tools like Xero, Figured, CashManager Rural and Farmax helps in full farm analysis and to put you and your team in the best position to stay ahead of the curve and continue to operate in a profitable manner.

Regan McCorquindale, LIC FarmWise® Consultant