By FWi staff

TWO-THIRDS of farmers are taking steps to spread their overheads, but doing it in the wrong way could be costly.

A recent report compiled by Deloitte & Touche and RASE, The Cost of Expansion Growing your Options, shows how vital it is to pick the right route to secure top profits.

Doing nothing is not an option, Mark Hill, of Deloitte & Touche Agriculture, told visitors to Cereals 2000 last week.

Margins are being squeezed to the point where profit is minimal.

Mr Hill predicted that the average client would only break even in the 1999 harvest year. In essence, the message is: If you can, grow, get together or get out.

The report was based on a survey conducted by Deloitte & Touche of 250 clients and RASE members.

This showed that 68% were using a contractor for some tasks.

About half were hiring machines, rather than owning them, a similar number were undertaking contracting work for third parties and 27% were sharing machinery with neighbours.

The effect these options had on farm profits was assessed using a model farm of 300ha (740 acres), mainly combinable crops, which was breaking even.

Labour consisted of the owner, one worker and a summer student.

Increasing income by undertaking contracting (the most popular option in the survey) was the least effective, producing a figure of just 12/ha (5/acre).

Farmers seem to justify their investment in new farm machinery by farming more acres.

“They look at their kit first, rather than their bottom line. This is what counts, said Mr Hill.

Entering a stubble-to-stubble contract or a farm business tenancy increased the bottom line by 35/ha (14/acre).

However, while the former carried no risk, the FBT would allow profits to rise if commodity prices increased.

Minimising costs by making the worker redundant and using a contractor for some operations raised net farm income by 52/ha (21/acre).

Contracting the whole farm out on a stubble-to-stubble contract improved things dramatically, raising NFI by 128/ha (52/acre).

A manager contract arrangement was even better, at 142/ha (57/acre).

But the most profitable route for this farm was to merge it with two similar neighbouring farms, which boosted net farm income by 169/ha (68/acre).

No key money is needed, said Mr Hill.

Costs can be reduced immediately by getting together with like-minded, similar-sized businesses.

Colleague Sarah Anderson believed more farmers would adopt this route.

There is increasing interest, and the next 3-5 years will see an upward trend in the number of shared farms.

It will certainly take off when farmers start thinking about doing something rather than just sitting on the fence hoping the situation will improve.