21 March 1997

Scope to lower fixed costs

In the second article of our series looking at unit cost of production, we assess the scope to bear down upon fixed costs. Charles Abel examines some new thinking

GREATER mechanisation and farming more acres are not the best way to cut fixed costs. Good business management is far more important, according to a recent study of arable farm profits.

The study looked at mainly combinable crop businesses in eastern England farming almost 29,000ha (71,000 acres). All had replaced labour with machinery over the past five years. But for the average and less profitable farms that increased rather than reduced total power and labour costs.

"It is amazing to see. Mechanisation simply has not worked for the average farm business," comments Gary Markham, business consultant with accountant Grant Thornton, which conducted the survey.

The result is a £50 difference in the unit cost of producing a tonne of wheat, before area aid, drawings, tax and sundry income. The top 25% of producers managed £87/t, while the bottom 25% did £137/t. With wheat at £90/t that discrepancy needs addressing, urges Mr Markham.

On average labour costs fell from £120 to £93/ha. But any saving was more than offset by machinery costs which climbed from £174 to £243ha. The consequence was a rise in total power and labour costs from £294 to £343/ha.

By contrast the top 10% of businesses cut labour costs from £127 to £51/ha, but only increased machinery costs from £140 to £191/ha. Their total power and labour costs fell from £270 to £243/ha as a result.

"Everyone should be aiming for £245/ha as a target. And it can be achieved. The idea that you have to have more acres to spread the cost does not work in practice without good management. The average size of the most profitable farms was 235ha – the average for the whole survey was 318ha."

The way a farm equips itself and manages labour is the key, he says. "A change in management attitude can make a big difference."

The survey suggests the less profitable businesses have gone astray by trying to apply the principles adopted by large farming businesses – namely investing in high output equipment to farm more land at less unit cost.

Buying second-hand, using contractors where appropriate and managing labour more effectively is a better approach, particularly for medium sized units, he suggests.

"Too many of the less successful businesses are tremendously busy, but theyre not focusing on the key issues." Cutting labour and directing it to more appropriate work would help.

Figures for sundry receipts confirm that view. The least profitable businesses had the highest ancillary income – £169/ha compared with £66/ha for the top 25%.

Even when those figures are added to crop income, the hierarchy of total profits remains the same. The top 25% of farms for arable profits manage £490/ha total net profit, while the bottom 25% achieve just £130/ha.

"Farms which are not making what they should from their cropping could be looking to alternative enterprises to boost profits. But they arent managing those particularly well either." Focusing attention on the core business could be a better approach, Mr Markham suggests.n

More machines and more land arent enough alone -Gary Markham of Grant Thornton.


CUTTING FIXED COSTS


&#8226 Match labour and machinery policy to your farm.

&#8226 Focus management on cropping.

&#8226 Seek outside advice.

&#8226 Get full agronomy advice – fertiliser, seed and rotations as well as agchem.

&#8226 Avoid wasting time on less profitable ancillary income.


Average unit costs (£/t) – w. wheat

Harvest year19961995199419931992

Yield (t/ha)8.08.07.87.45.3

Total costs989897104109

Total adjusted for set-aside102102103110109

Area aid (£/ha)2652671911400

Area aid contrib333425190

Net cost68697892109

Ave price (£/t)_117106106122

Net margin_48281413

Source: Grant Thornton client survey – 29,000ha mainly combineable, E England.