28 March 1997

Drive down costs with a

fresh look at operations

Our latest article in the "How Low Can You Go" series considers a novel approach to calculating unit costs. Charles Abel reports

UNIT cost of production can be measured in a variety of ways. Sometimes there seems to be as many ways as there are economists.

Now a leading distributor company thinks it has a practical approach to help farmers.

"By looking at variable costs and the costs of carrying out field operations we can arrive at a unit cost of production for the actual growing of that tonne of wheat," explains David Stormonth of leading independent input supplier Brown Butlin.

Such a cost does not include overheads like rent, finance, management and secretarial costs. That makes it far more useful for focusing on what makes a difference in the field, he maintains.

Total overheads have to be taken into account when looking for a break-even cost for the business, he acknowledges. "But they have little direct connection with the practicalities of growing a tonne of wheat – theyre more to do with the nature of running the business. Field costs are something the farmer can influence."

Gross margins dont provide the full picture, he adds. They consider input costs, but take no account of machinery and labour. Furthermore, they add the variables of crop sale value and CAP support.

"We know that area aid is a short-term, variable feast and that the grain price is affected by parameters outside our control. So we need an approach that looks at the things we can control."

Unit costs using operational costs attach a real cost to the use of labour and equipment – something farmers overlook, he stresses.

Calculating operational costs need not be a problem, he says. Standard figures exist, which apply the cost of the machine, operator, fuel, depreciation, repairs and maintenance costs to each hectare treated.

Fine tuning those figures is possible. "Larger, more efficient machines should drive down operating costs, which can be recalculated and fed back into the calculations," he suggests.

For the past 10 years Brown Butlin has collected variable cost data for its Prophet service (see panel). Now the programme is looking to address operational costs too. Early indications are that those are typically slightly more than total variable costs.

When those costs are divided by yield the unit cost of field operations should work out at about £35/t. Together with typical variable costs of £30/t, that gives an average unit cost of production of £65/t in the field.

Significantly lower figures can be achieved. Last year one farmer achieved total field unit costs of £45/t. "Admittedly that was a very slick operation. But it shows what can be done," says Dr Stormonth.

"There is a view that total machinery costs will be the same, whatever the use of the equipment, once its been paid for. The more you use it the better." He counters that view. "If you use a machine more its going to depreciate more rapidly and require more repairs, quite aside from the extra labour and fuel costs.

"That ought to be borne in mind. By using standard costs the true importance of an operation can be weighed against its benefits."

Autumn establishment is a prime example. Soil conditions can have a crucial bearing upon costs. A harsh, dry autumn requires greater costs than a wetter autumn when seed-beds are easier to prepare. However, thinking about an alternative approach, perhaps saving a pass with the discs and the power harrow and raising the seed rate could do much to cut the unit cost of production.

A common concern is that changing field operations can hit timeliness, knocking crop yield. Dr Stormonth insists that need not be the case.

"Is it better to make an extra pass to hit the right timing, or using an alternative product, or higher rate which offers a wider application window so applications can be combined? When faced with a choice between £10/ha for the extra pass with a sprayer and perhaps £3/ha more on an input, I think I know which way most farmers are going to go. If you look at operational costs in this way, it really can help you make judgements."

If that sounds like a salesmans charter, think again, urges Dr Stormonth. "What it shows is that there are clear opportunities for making more profit by striking the right balance between variable costs and operating costs.

"Variable cost savings are very immediate. You can see the benefit when you dont have to write a cheque at the end of the month. With operational costs its less obvious – savings feeding through the farm accounts over a number of years, as reduced depreciation, lower maintenance costs and labour reallocated to more profitable work. But the benefits can be far more significant." &#42

Adding variable costs to operational costs gives a revealing insight into the unit cost of production a tonne of wheat, says Brown Butlins Dr David Stormonth..

Prophet system

The Prophet farm recording system has been running for 12 years on 20-50,000ha. Farmers record information on usage of seed, chemical and fertiliser, which is then transferred to computer. Actual input costs are attributed and yields and sale prices included to arrive at a gross margin figure.

Starting in autumn 1997 operational costs will be added, to provide a practical unit cost of production.


&#8226 Practical approach to calculating unit cost.

&#8226 Standard figures help – can calculate own.

&#8226 Take account of labour, finance, repairs and fuel.

&#8226 Every operation has a cost.

&#8226 Small rise in variable cost could allow big saving in operational cost.

&#8226 Release labour for more profitable work.