Effective farm business management - the challenges and opportunities from a grower's perspective

Take home messages:

• Despite increasing scale by a factor of two, costs have still increased by 50% over the last ten years. Some of this may be attributable to increased use of inputs like fertilisers; nevertheless escalating costs pose a challenge to profitability.
• The challenge of escalating costs has been addressed by gains in productivity.
• The increased reliance on external information networks has made us better appreciate the importance of relationships (e.g. with suppliers and financiers as well as production advisers) and the need to develop and nurture them.
• As a farm becomes bigger and involves another generation, there is a need to turn our attention to the people inside the organisation and the formalities (job descriptions, staff reviews, training, individual equity in the business) needed to foster their individual long term growth and development.
• The increased volatility of grain pricing coupled with the variability of the seasons requires a greater focus on the risk profile of the farm and systems to manage that volatility.
• As grain farming has become a more sophisticated business, there is a heightened need to source reliable, skilled and informed assistance to enhance the quality of decision making.

Introduction

Grain farming in 2013 is significantly different to a generation ago. 30 years ago we would have argued that we were an efficient family farming business and we probably were, but grain farming is a more sophisticated and volatile business in 2013. Today’s grain business has many of the same issues of productivity, cost controls, profitability and people management that were experienced 30 years ago, but I think there is a heightened focus on these issues along with greater expectations of people, including their safety, business compliance and strategic approaches in today’s grain farming businesses.

For context, we operate a 4,900ha family grain property at Murtoa in the Wimmera, with a limited number of ewes run across the non-arable areas of the property. I work with a younger brother, our wives, two sons (one married) and a full time employee. However, many of these thoughts should apply across all grain properties, no matter their size.

Reflecting on the changing dynamics of the farm and the increasing role of external advice, I note the progression over 40 years of our use of external advice.

• Owner manger and one employee with shearers twice a year (1969) to five full time employees, seasonal contractors, and up to nine on the team at harvest.
• From a small town solicitor doing the annual tax processing in 1970 to a regional town accountant with almost weekly business management contact.
• From Department of Agriculture advice to employing our first independent adviser (business management) in 1972 to now receiving advice in agronomy, legal structural, finance management, business management systems using both independent and business connected professionals.
• From paddock benchmarking (MEY Check) to discussion groups (FM500) to broader farm benchmarking (UNE and FAST) to the development of internal benchmarking from the early 80’s to now.
• Establishment of a farm advisory board in 2008 to better formalise decision making and adding rigor to capital and strategic decision making.
• Despite increasing scale by a factor of two, costs have still increased by 50% over the last ten years. Some of this may be attributable to increased use of inputs like fertilisers; nevertheless escalating costs pose a challenge to profitability.
  • Total costs (all operating costs with depreciation and management allowance but without farm ownership costs) have increased from around $225/ha to around $380/ha in ten years.
  • Fertiliser costs have increased from $41/ha to $91/ha with N increasing from $28/ha to $46/ha over the last ten years.
  • Pesticide costs have dropped from $57/ha to $48/ha over the same period.
  • Total costs include farm management allowance of $50/ha from $28/ha ten years ago.
  • Contracting, repairs and maintenance, fuel, wages, depreciation costs up $80/ha in ten years.

The challenge of escalating costs has been addressed by gains in productivity.

• This is most obvious in tracking the history of water use efficiency of canola (grown mostly on fallow), wheat and barley. But it is not necessarily the same with lentils.
• There seems to be an increase in summer rain and that is utilised much better than previously with a greater focus on timely summer weed control.
• Stubble retention and inter row sowing has also contributed significantly.
• Much of this productivity gain can be attributed to better farming systems. The ability to work machinery over a larger area is significant. Ten years ago we were working with minimum tillage techniques, but average paddock size has gone from 65ha to 117ha. Seeder size has increased from a 12mtr bar and 6,000ltr bin to an 18mtr bar and 15,000ltr bin. The same sort of story applies with spraying and harvesting capacities and efficiencies. We now have 5 paddocks greater than 200ha in size.
• Gains in productivity have been accompanied by an increased reliance on outside sources of information and external advice. This trend goes back beyond thirty years.  

The increased reliance on external information networks has made us better appreciate the importance of relationships (e.g. with suppliers and financiers as well as production advisers) and the need to develop and nurture them.

• Farmers have “partnership” style relationships with all sorts of service providers.
• Farmers trust and rely heavily on the advice they receive.
• There are three main considerations in our dealings with input service providers. We want the best quality product, with the appropriate service, at the most competitive price. The main variable here is what the appropriate service levels are and to be able to clearly articulate what we want as the other two are easy to measure.
• We expect our various advisers to deal with us with integrity and independence and be perceptive and challenging with evidence based advice.
• While we seek advice from independent agronomy services and other production specialists like BCG or retail suppliers, we make our own decisions and take responsibility for all outcomes.
• An ever increasing use of the internet with real time information with weather trends and forecasts, global grain production and pricing, input costs and paddock and farm performance recording systems.  

As a farm becomes bigger and involves another generation, there is a need to turn our attention to the people inside the organisation and the formalities (job descriptions, staff reviews, training, individual equity in the business) needed to foster their individual long term growth and development.

• For many years the old adage was “get big or get out”. In reality though we have seen many successful farming partnerships divide to allow for the individual needs of the next generations coming through. We have a belief that rather than splitting resources, there is much to gain by pooling resources. Resources include land, machinery, working capital and most importantly, people.
• Clearly a group of individuals will bring together quite a different set of talents. There is much to be gained from that diversity. People do some tasks better than others. The challenge is to effectively tap into these talents.
• The formation of the farm advisory board has been a conduit to address the many issues that come from a more complex business.
• The skill set and experiences in the independent advisory board members must be diverse and they must be challenging and yet have a strong level of understanding of business in particular, and agriculture in general.
• Matters discussed include financial position, strategic direction, operational challenges and structural and personal desires of partners including succession planning.
• The board is expected to challenge the operators of the farm as though it has the governance powers of a company board and no topic should be “out of bounds”.  

The increased volatility of grain pricing coupled with the variability of the seasons requires a greater focus on the risk profile of the farm and systems to manage that volatility.

• When looking at the actual income achieved from a grain production year compared to the budgeted income, over the last 17 years the variation has been as much as 99% above budget and 68% below budget.
• The first 2 * 6 years and the last 5 year average, incomes were very close to budget showing that the budget methodology is sound.
• The timing of sales and the use of FMD’s helps smooth this production variability.
• The use of various grain marketing techniques such as forward and delayed sales, swaps and options are becoming more important.
• There is a need to develop a clear understanding of what is driving the farm price (international price, currency, and basis) and how each of these sits in the long term cycle.

As grain farming has become a more sophisticated business, there is a heightened need to source reliable, skilled and informed assistance to enhance the quality of decision making.

• It is reasonable to assume that farm management will continue to become more complex.
• The capital invested in farming will continue to grow with the demand in management of that capital becoming more intense and sophisticated. Farms are becoming multi-million dollar businesses.
• Capital expenditure is looked at in a more detailed sense than was probably the case in years gone by. Options of capital expenditure on plant versus contractors are always at the forefront of any decision. Why own when we can contract? What are the contract costs? How will we manage labour if we buy?
• Information is sought from consulting agronomists, marketing brokers,  accounting, legal, business structural professionals, banking, various input suppliers, contractors and probably others.
• Regulation and compliance is an ever increasing challenge with more documentation required as a consequence.

Conclusion

Farmers clearly have to be multi skilled. They need to be intuitive, patient and decisive. While being intuitive is a great skill, there is an ever increasing need to build processes around this skill set. Increasing volatility requires a deeper understanding of the business we are in, detailed record keeping and analysis of those records and a high level of confidence and understanding of the reasons things, such as the volatility of the grain market, exist.

Farm Management is “Work in Progress”

Contact details

Leo Delahunty
leodel@wimmera.com.au