26 February 1999

STRIKE RIGHT BALANCE TO CUT

COSTS

Production costs need

cutting. But is ruthless

attention to overheads the

best bet? Will Gemmill of

farm business consultant

Strutt & Parker argues for a

more considered approach

WHAT shall it profit you to get thoroughly on top of fixed costs and then find that, for a variety of reasons you are losing yield and income as a result?

Failure to do a job when it should be done, overworked and ill-equipped staff, higher repair costs, more down time – can all leave you worse off than before overheads were first addressed.

The trick is to strike a balance between cost savings and efficient production. The factors in the balance should be those that affect the critical times of the arable year – harvest, autumn cultivation and drilling – plus the variables of weather and soil type and specific farm characteristics such as field size and distribution.

On 800ha (2000 acres) of a good sandy loam where a one-pass seed-bed is a distinct possibility, with an average field size of 20ha (50 acres) and all within a ring fence, it will almost certainly be easier to meet or even beat the current target of a man to 300ha (750 acres). The same area of strong clay where the field size is 4ha (10 acres) and the field furthest from the yard involves a five-mile round trip will present far more of a challenge.

Effect of size

Table 1 indicates the effect of farm size. The 161ha (400 acre) farm benefits by £14,000 where a contractor is employed on a whole farm basis at £247/ha, the current going rate. At that price a 404ha (1000 acres) farm is breaking even on fixed costs and anything beyond that size will be more profitably managed in hand.

Across all of Strutt & Parkers managed farms in East Anglia, the target is a minimum of 200ha (500 acres) a man. In some cases 300ha (741 acres) is achieved. But the critical months of July, August and September are borne in mind. Enough casual labour must be available in those three months to ensure harvesting, storage and drilling of the following seasons crops are carried out correctly and on time. Those casuals must go into the equation that produces the labour/ha ratio.

It is better to have one or two well trained and highly skilled and motivated people rather than more of more moderate ability. Motivation comes from strong leadership and good communication – clear identification of goals, effective planning to meet them and a full understanding of both among the team. This is supported by training and equipment which instils in everyone the confidence that the job can be done well.

If these criteria can be met the two other essentials to efficient man-management, namely security in the job and a decent income gained from it, are more likely to fall into place because the business will be well on the way to the profitability which underpins them.

Labour is closely linked to machinery. People do not work effectively with out-of-date or poorly maintained equipment. Good kit, correctly matched in performance to the size and enterprises of the farm and properly maintained is a tremendous boost to confidence and can save a lot of money.

Consider the potential effect upon wheat quality, and thus the end price, of a major combine breakdown at the height of a catchy harvest – a time when a flying pig is more likely than a replacement machine.

There are a number of ways to reduce machinery costs, particularly for equipment which is used for relatively brief periods at peak times only. The obvious examples are the combine, additional tractors for corn carting at harvest, and high horsepower tractors for the autumn cultivation/drilling peak. Contract hire, sharing, a contractor or membership of a machinery ring all have their merits in comparison with the purchase of new or used equipment. Some of the pros and cons are shown in table 2.

At peak periods

Short-term contract hire is particularly useful at peak periods when additional machinery is needed to equip the casual labour force. But it can also be expensive. A new combine hired to cover 161ha (398 acres) of combinable crops would have an annual cost of £85.21/ha (£34.50/acre) at current rates, compared with £56.10/ha (£22.75 acre) for an £85,000 machine shared between two neighbours (see table 3). The cost of buying new is not far short of the £87.06/ha (£35.25/acre) for a £70,000 machine.

Sharing pays off when the equipment is highly specialised, very expensive to buy and where its use can be planned among a number of owners, such as pea viners, combines and beet and potato harvester. In such circumstances co-operation has to extend well beyond the use of the machine. It must also consider the planning of cropping, varieties and drilling dates to reduce conflicting demand for its services.

More flexibility

Contractors offer greater financial flexibility to the farm business because they reduce capital expenditure as well as labour and management time. Their greatest value is also at the peaks of the arable year and for specialised work such as spraying and sugar beet drilling. They also offer particular advantages on small areas of land where the farms own capital investment in machinery cannot be justified, and on off-lying fields where employment of the main farms labour and machinery is inconvenient and time-consuming.

Machinery rings – effectively the sharing of hire or contract services supplied either by fully fledged contractors or a group of farmers, or a mix of both – can be highly effective. But they are very dependent upon the organisational skills of the administrator of the ring.

Contractors are challenged by similar problems but have changed greatly in recent years. Competition and margins are such that they dare not be unreliable, the common charge once levelled at them. They cannot afford to run clapped out kit worked by untrained staff.

Sharing is probably the cheapest potential option and there is increasing scope for communal use of equipment such as balers and hedge cutters, where timeliness is less crucial. To avoid disputes, the agreement under which the machinery is bought or otherwise acquired by the syndicate needs to be in writing and needs to specify in detail how it will be used and how expenses such as repairs and maintenance will be met. Every contributor needs a legal share in case of an insolvency within the group.

Purchase of new machinery is almost invariably the most expensive route. The advantages of low maintenance and repair costs, and therefore reduced down time, will be matched by high interest charges and depreciation, plus a demand for capital which may be inconvenient to meet.

New equipment should bring the latest in technology and, by its reliability, ensure timeliness of use. But before signing any cheque it is always as well to question how far the cost of technology will contribute to increasing farm income and to what extent the demands of timeliness can be met by the efficient maintenance of existing or good second hand equipment.

As always in farming, there are no hard and fast rules. It is perfectly possible to reduce both the labour force and the requirement for expensive machinery by the judicious use of a contract or membership of a syndicate of some kind.

On the larger farm the economies of scale grow with the area being farmed, to a point at which neither contractor nor co-operation can out-do full individual control of men and machinery.

DOING IT IN PRACTICE…

PRACTICAL examples of the way fixed costs can be streamlined downward, drawn from Strutt & Parker managed farms in the eastern counties, show production cost economies can be achieved by increasing scale and improving labour and horsepower ratios.

A 160ha (400 acre) farm growing all combinable crops, including 50ha (123 acres) of herbage seed, staffed by two full-time men with seven tractors was taken on as a managed farm in mid-1997. Labour was 80ha (197 acres)/man and power ratio 5hp/ha.

The farm has since been expanded to 400ha (1000 acres) of all-arable cropping, including the herbage seed. It continues to employ two full-time men plus two casuals at harvest and there are two tractors plus one on short-term (six week) hire. The tramline system is now 24m (80ft).

The effect of these changes is to improve the labour ratio to one man per 175ha (432 acres) and the power usage to 1.2hp/ha.

A 280ha (700 acre) farm in a ring fence has one full time working manager plus two casual workers to cover harvest. There are two tractors working an 18m (60ft) tramline system and the power requirement, including a fork lift, is 1.2hp/ha. Labour including casuals is 225ha (555 acres)/man.

On a 1214ha (3000 acre) estate where Strutt & Parker has had long-term management, there are four full-time men including the farm foreman, plus four casuals at harvest. The farm runs five of its own tractors and hires a further two short-term for the harvest period. There is also a self-propelled sprayer and a fork lift.

The labour ratio is approximately 250ha (617 acres)/man and the power ratio, including sprayer and forklift is 1hp/ha. Production cost of wheat on this farm is £62/t.

&#8226 Will Gemmill works from the Chelmsford office of Strutt & Parker and is directly involved in the management of 8000ha (19,760 acres) in East Anglia. &#42

Table 1: Effect of farm size on overhead costs

162ha (400 acre) farm 405ha (1000 acre) farm

Overhead costs/year £ £/ha (£/ac) £ £/ha (£/ac)

Labour 20,000 124 (50) 40,000 99 (40)

Depreciation 20,000 124 (50) 35,000 86 (35)

Power 14,000 86 (35) 25,000 62 (25)

TOTAL 54,000 334 (135) 100,000 247 (100)

Table 2: Machinery options

Advantages Disadvantages

Buy new Low maintenance and High depreciation and interest. repairs.

New technology. High capital investment.

Little "down time". Potentially most expensive option.

Buy second-hand Lower depreciation and High repair/maintenance cost. interest costs.

Less capital investment. Increased "down time".

Timeliness of operation. More chance of buying a dud.

Potentially cheaper than

buying new.

Contract hire No repair costs or In some circumstances "down time". most expensive option. Easy to budget costs.

No depreciation/interest.

New technology.

Timeliness of operation.

Machinery share Share depreciation Problem when both want and interest. machine at same time.

Greater efficiency of Timeliness of operation.

machine.

Potentially the Who supplies operator/ cheapest option. pays repairs?

Contractors No capital investment. Timeliness of operations.

No operation costs Pride in carrying out own work.

Greater flexibility.

Reduce labour or employ

elsewhere.

Table 3: Combine harvesting costs

New Used Machinery Contract Contractor

machine machine share hire

New machine 70,000 40,000 85,000/2 – –

Overhead costs/year – – – – –

Hire charge – – – 12,000 –

Contractors cost – – – – 10,000

Average depreciation 7250 4100 4500 – –

Average interest 3000 1750 1850 – –

Tax & insurance 350 350 250 300 –

Operating costs 3500 4500 2500 1500 –

Total cost 14,100 10,700 9100 13,800 10,000

Cost £/ha 87.10 66.10 56.21 85.25 61.77

(£/acre) (35.25) (26.75) (22.75) (34.50) (25.00)