5 April 2002

How to further reduce the cost of production

Continuing to trim production costs is proving

increasingly difficult. Charles Abel relays some useful

pointers from speakers at the recent farmers weekly/

BASF Brave New World of Arable Farming meetings in

Perth, York, Coventry, Newmarket and Winchester

MOST farms have already done much to tackle production costs. So what more can be done? Speakers at the farmers weekly/BASF seminars identified four key issues.

Size

Farming more land to spread overheads has been popular. But the growing trend now is to seek a truly optimum scale, as severe cost pressures bite hard, says David Bolton, of farm business consultants Andersons.

So-called lumpy investment has been the problem, the extra man or machine needed to cope with more acres rarely being made full use of.

Indeed, Cambridge University survey data shows the most profitable farm size last year was 267ha. "That is ironic because it is just 7ha more than the winner of last years farmers weekly/ BASF Unit Cost Challenge," says Mr Bolton.

Over-stretched businesses have become a real issue, jeopardising the timeliness of field operations and management control. "There is no point saving £10/ha on overheads if output suffers £30-40/ha because inputs go on at the wrong time," warns Laurence Goulds Peter Hall.

Grouping together is a viable alternative. "Invest in a pint of beer and discuss the scope for co-operating with your neighbours," urges Mr Bolton.

Rents are still too high, he accepts, but he believes they will drop. "I know they move up quite fast in the good times and do not come down with the same speed. But, like a rocket, what goes up must come down, it just does so more slowly."

Negotiating for rents to be linked to the value of a tonne of grain may be one option, Mr Bolton suggests.

Yield

Few dispute that yield drives profits, but just how to strike the right balance between inputs used and output is far trickier.

Simon Bennett, of national accountancy firm the Hutchinson Partnership, has little doubt yield must remain a top priority. "In last years Unit Cost Challenge, the winner spent £24.89/t on inputs and operational costs. While that was only one field in one season, it does help highlight some of the issues other farms need to look at. And yield was a key factor in the success of all the finalists.

"Mark Means low figure was possible thanks to a yield of 10.6t/ha. The other finalists all topped 10t/ha too. There is no doubt that high yields help dilute production costs."

A 10% yield loss would add £2.76/t to Mr Means costs. "That may not sound much, but at current wheat prices it is equivalent to 5%, which could be the difference between profit and loss."

Mr Hall agrees. "A 5% swing in Mark Means fertiliser use would change costs by just £5.13/ha, compared with £37/ha if yield varied by the same amount."

Good staff help, adds Mr Bennett. "If you are looking at min-till, have you and your staff the expertise needed. Extra training may be needed. And do they know enough to help optimise agronomy. That can help a lot."

Business plans

When looking at farm profits, consider the full enterprise mix and learn how to cope with greater risk in the cereal sector, says Mr Hall. "You need to be more like potato growers, learning how to cope with prices moving up and down more often."

And be realistic about the potential of the business, says Mr Bennett. "The most important characteristic of the Unit Cost Challenge finalists was their business understanding, based on good quality management and agronomy information."

That aids cropping decisions. "Focus on the good bits," says Mr Hall. "What is the point of trying to grow cereals on wet, late, compacted headlands, which produce poor yields of wet grain which delays harvest and adds to growing costs? Put it into set-aside instead and forget about it."

Contingency plans to cope with the unexpected are also helpful, says Mr Bolton. "There is plenty of contracting capacity out there, so make use of it, so you have help if you need it. Contingency plans can help with marketing too. What do you do when a malting barley load is rejected, for example? Accept the £12/t cost of having it returned to the farm, or do you have an alternative outlet in mind already?"

With margins so slim having answers to problems before they arise can make a big difference to farm profits.

Machine life

Extending machine life can do much to cut depreciation, says Mr Bolton. "It is hours worked, not seasons, that count.

"Given the right maintenance, machines will last a lot longer than you think. Look at a London taxi. The cost of replacing the timing chain every 30,000 miles looks expensive. But if it means the machine goes on to do 1m miles it is worth it."

Indeed, Mr Means could get harvesting cost significantly lower than £44/ha. "He is doing just 140 hours/year. I would suggest 200 and up to 290 hours is possible. I know of one farm harvesting 2800 acres with one Claas Lexion – that is 400 hours/season. It carries risks and you need to have a contingency plan in place in case of breakdown, but it is one way to really cut costs."

&#8226 Next weeks seminar report looks at the overall strategic issues affecting arable farmers. &#42

The farmer and the train driver…

Are you getting satisfactory returns for capital employed? asks Mr Bolton. "A train driver earning £27,000/year has very few capital costs. All he turns up for work with is a bag of sandwiches, a Thermos of tea and a Daily Mirror. Compare that with last years £8000 average farm income, where there is considerably more capital involved. There is an opportunity cost there which needs to be considered."