IMPROVING BUSINESS PERFORMANCE
The firm’s latest survey reveals how risky a tactic that is. The figures – gleaned from 106 combinable crop and root farms covering almost 37,000ha, with financial year ends up to the end of April 2006 – show that the average business made a profit of just £98/ha in 2005-06 before single farm payment receipts.
That was insufficient to cover private drawings and tax, even though this was a fairly typical year in terms of yields and prices. And, while the average group performed significantly better than the bottom 25%, it only made about half the profit achieved by the top quartile of farms.
“Achieving high output per hectare is a key factor in delivering high profit,” Mr Wilkinson explains. “The most profitable cereal-only farms achieved an output figure of £992/ha. That was £193/ha more than the average, despite spending just £10/ha more on variable inputs and £5/ha more on overhead costs.”
The top group also spent less on crops. Taking wheat as an example, these top 25% spent an average of £71/t, while the bottom quartile’s costs rocketed, topping a staggering £110/t.
“Similar distribution results are found for other cereals and break crops,” Mr Wilkinson says. “I believe that the majority of arable farm businesses do not know how efficient they are, or what it is that makes them profitable or not.”
While cereal prices have improved since the survey was carried out, these figures show that many farms will continue to struggle to make a return even if they can sell their feed wheat for more than £90/t.
“There is still an urgent need for farmers to address these costs, especially when no one knows how long these better prices will last,” he advises. “While some of the recent lift might be down to future biofuel demand, a lot of it is also due to the Australian drought. I would suggest that volatility, rather than a higher price, is here to stay.”
Of course, if the SFP – worth about £27/t on an 8.5t/ha crop in England – is included in the sale price, the figures look much better. But, says Mr Wilkinson, growers must remember that the single payment regime is in transformation, and declining in value, through to 2012.
“The SFP is a window of opportunity to look at either making the business competitive and efficient, or restructuring by ceasing farming the land,” he says. “It can then either be farmed by an efficient business and/or changed for environmental benefit, gaining additional support payments in the process.”
There are several areas where poorer-performing businesses can take action to improve their position, says Mr Wilkinson.
“We have seen that high output is critical. Achieving this consistently means attention to detail, field by field, crop by crop, to maximise yield and quality.”
The best businesses also produce to a market specification, and are realistic about the ability of the land and the farmer to achieve premium quality crops, year in year out. As a result, these businesses are idling a surprisingly large proportion of their land.
“Identify blocks of land that do not yield well, and do not crop them. The most profitable businesses, certainly those with lowest production costs, had set-aside and fallow over 20% of the farmed area.”
Crucially, they also control costs accordingly, says Mr Wilkinson. “There is no point at all just not cropping an area of the farm, but making no other structural changes. The marginal savings on fuel, labour and an allowance for repairs will probably not be greater than the loss of output on land.”
Farmers will find it much easier to make further improvements by benchmarking their business performance with established data, he adds. “This will enable you to establish how well you compare and to identify which parts of the business to target. Benchmarking is not just about comparison of what has happened. It should include setting achievable targets for next year and future years.”
Those aiming to improve profits should also understand the cost of every action involved in the production process, Mr Wilkinson advises. “This means starting to think about the business in cost-of-production terms. Start working out your own unit costs.
“Initially, you will need to make assumptions about allocations, but provided all costs are allocated out, the results and conclusions should be robust. If you have neither the time nor confidence to tackle this yourself, get professional advice.
“This does not have to mean one-to-one advice with a consultant, it could be working with a group of other arable farmers to learn from each other how to do the assessment. In either case, ADAS can help.
“If there is not an existing business club in your area, join or start business clubs to work with like-minded farmers, all of whom are looking for a viable farming future. These groups must not be the traditional discussion group. They need structure and focus, all members must contribute and participate.
“Finally,” says Mr Wilkinson, “remember there is no such thing as ‘I can’t change that’, certainly as far as variable and operating costs are concerned.”
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