12 June 1998

Split outlay to spot opportunity for savings

The winner of the 1998 Unit

Cost Challenge, sponsored

by distributor Brown Butlin

and farmers weekly and

supported by accountant

Deloitte & Touche, will be

announced at the Royal

Show. While the finalists

await the result Charles Abel

relays some key messages

from accountant judge

Simon Bennett

TWO financial messages emerge from the 1998 Unit Cost Challenge – think carefully about the split between establishment, maintenance and harvesting costs and push inputs for all they are worth to maximise yield.

"Regardless of the final ranking, the six finalists in the Unit Cost Challenge all did remarkably well to keep their wheat variable and operational costs below £40/t," comments accountant judge Simon Bennett of Deloitte & Touche.

Motivation and management skill to extract the best from available resources was a consistent key to success. That ensured inputs and operational costs were organised to deliver big crop benefits at least cost.

But the variation between finalists in variable cost a hectare was small, ranging from £214 to 248/ha (£87 to 100/acre), a spread of only £34/ha (£14/acre) or 15%.

That confirms results from Deloitte & Touches own survey of farm costings, which shows little difference in per hectare spend between farms in the top 25% for profitability and those in the bottom 25%.

By contrast operational costs ranged from £108 to 174/ha (£44-£70/acre), a spread of £66/ha (£27/acre) or 47% of the average operational cost.

"The use of inputs has become a fairly precise art, with little scope for cuts without compromising yield. But a fresh look at operational costs, breaking them down into establishment, maintenance and harvesting, can be revealing," says Mr Bennett.

The chart shows how the finalists figures split. Establishment took the biggest share, averaging 41% of the total operational spend. "Tillage and drilling equipment has become relatively more expensive recently, sending this group of costs rocketing. Farmers need to ask themselves why that is.

"Regardless of the system used, whether minimal cultivations or ploughing and subsoiling are required, it is essential the farmer knows what it is costing him. He can then ask whether it is bringing real benefits, like more timely and even establishment and the chance to establish more acres on time?"

Turning to maintenance operations – those activities associated with growing the crop – costs are highly dependent on the number of passes with the sprayer and spreader. "Any steps that can reduce the number of passes can have a big impact. Finalists in the competition ranged from four passes of each to seven of each." But care is needed to avoid any impact on yield, Mr Bennett notes. "Doubling up applications may reduce timeliness, so the cost benefit of such exercises needs to be thought through."

Finally, harvesting costs also need attention. The message is well known, but needs restating, Mr Bennett says. "Harvesting costs are always an emotive issue, hinging around one large piece of very expensive equipment that hopefully works flat out for one or two weeks of the year.

"But past work by Deloitte & Touche shows that only farms larger than 400ha or 1000 acres can really justify a new state-of-the-art machine, if they propose changing it every five years."

If you do not meet those criteria there are three options to consider, suggests Mr Bennett:

&#8226 Buy second-hand.

&#8226 Keep the machine for longer.

&#8226 Hire in a machine/contractor. &#42

UNIT COST CHALLENGE

&#8226 Little scope to alter variable costs once inputs used efficiently.

&#8226 15% variation in variable costs; 47% variation in operationals.

&#8226 Match operational costs to real yield-building opportunities.

DEPRECIATION

Depreciating the value of a new machine in a straight line from purchase price to its current or perceived future value is unacceptable, stresses Mr Bennett. "Businesses must take account of the real costs of depreciation each year, not average it over a longer period. If a radical change is needed in the farm business you need to know where you stand now, not in five years time." Using a reducing balance reflects the reality of heavy depreciation in the early years, he notes. Current or future valuations are also notoriously unreliable when it comes to realising the value of a machine, he adds. Within the competition machines were subjected to reducing balance depreciation, with some rate adjustment to reflect the use and maintenance of the machine.

Getting to grips with true on-farm costs is vital if UK growers are to remain competitive in world markets, says Simon Bennett of accountants Deloitte& Touche, Cambridge.