24 August 2001

RESPONDING TO THE WINDS OF CHANGE

Arable farm businesses are

under pressure to change

like never before.

Andrew Swallow asks a

leading bank manager how

growers should respond and

reports on two businesses

that have battened down

the hatches and are still

making profits

ARABLE farms are going through a revolution. Never has the economic pressure to restructure been greater, but how to go about it is not always clear.

"Most businesses have some tough strategic decisions to make to remain profitable," warns Lloyds TSBs Bruce Clark. "Unfortunately, in the rush to remain competitive, some are making the wrong decisions.

"Many commentators talk about the winds of change blowing through the industry, but it is becoming more like a gale," he says. MAFF figures chart the exodus from the industry and the banks own 2001 farm survey results show 65% of producers expect a further 20-30% reduction in the numbers farming in the next five years.

Planning for survival demands a careful analysis of current costs and a realistic appraisal of possible changes. Within that, a clear view of existing power and labour costs is essential. That is where most potential for savings lies.

But getting bigger is not necessarily better, says Mr Clark. "Taking on more acres should only be considered if there really is surplus capacity. And by that I dont mean surplus tractor or combine capacity, but management capacity."

Horsepower and labour can be bought in to match land and crops, but the skill of the business manager cannot be increased overnight, he says. Some skills, like field walking and crop marketing, can be bought in – at a price.

"I am not saying do not expand, but simply understand what the limiting factors on your farm are before making that decision."

The most significant single cost relative to output is machinery, he says. In many cases it can equal input costs. "It must be planned. Ask yourself what is the farms machinery replacement policy? What are the capital requirements?

"The bottom line is you have to know your costs and what they are made up of. Ideally work them out yourself because you will have a better understanding of them. But if necessary get a third party in. The key is to identify them so areas for improvement become clear."

For some farms, continuing production without change will only erode the asset value of the business. "If you are in this situation consider options such as teaming up with neighbours to form a farming company or selling your machinery and contracting in operations.

"There is no one right answer. Which is best for you will depend on your personal objectives. What is important is that these dovetail with the finances. If they dont, it is time to think again."

RESTRUCTURING

&#8226 Know where you are starting from.

&#8226 Identify limiting factors.

&#8226 Management skill key.

&#8226 Bigger is not necessarily better.

&#8226 Take third party advice.