Knowing how much it costs to produce a tonne of grain is a vital piece of management information. Yet determining and managing the cost can be easier said than done, argues Simon Bennett
of chartered accountant Deloitte & Touche Agriculture
MOST cereal farmers have a good grasp of what prices are available for wheat sold today. Many will have set prices for a year or more ahead as they draw up budgets for their arable crops. However, few really know just what it costs to produce a tonne of wheat.
That is why the Royal Agricultural Society of England and Deloitte & Touche Agriculture are running the Cost of a tonne demonstration at Cereals 98.
The advent of computerised farm records and accounts has made it far easier to keep track of direct costs associated with any crop, even any field. So an analysis of gross margins – sales achieved minus cost of inputs such as seed, fertiliser and agrochemicals – can be determined at the press of a button.
However, the overhead costs of any farming business can turn a healthy gross margin into a serious loss. That is why professional management needs to be able to calculate the cost of producing each unit of output, be it a tonne of wheat or a litre of milk.
Few arable farms practice monoculture and it is the enterprise mix that makes it so difficult to determine the unit cost of production for each commodity produced on the farm. For example, on the classic dairy and arable farm you could employ a herdsman for the cows, a tractor driver for the combinable arable crops and another person for relief milking and arable back up. A realistic assessment of how the labour is divided up has to be taken.
Similarly, the big tractor which does all the heavy autumn cultivations and is the prime power source for silage making offers the challenge of deciding how operating costs are to be allocated between enterprises. Even on an all-arable farm there can be difficulties dividing power, labour and machinery between labour-intensive root or vegetable crops and combinable crops.
It is not easy, but it is not impossible. And it is better to make informed estimates rather than put the task to one side.
For the coming year business plans should seek to produce wheat crops below a target price of £80/t.
This can be done as the Deloitte & Touche Agriculture statistics show. Bringing together the results of our clients, representing more than 100,000ha (247,000 acres) of farmland, we are able to produce average costs of production as well as the costs of producing a tonne of wheat achieved by our top 25% of farmers and the bottom 25% (1).
For the past five years our top performing cereal growers have produced wheat for less than the target £80/t.
But identifying unit cost of production is just the first step. The chances are the results will be an unpleasant surprise.
Profitability comes from driving these costs down, without threatening output. Over the years it has become clear that the key to lowering unit costs is increasing output, rather than stamping on input costs. In fact our top 25% growers spend as much on each hectare as the bottom quartile. The difference is that they get more tonnes back for their investment.
Where cost of production can be driven down is in looking seriously at the major costs of power, labour, machinery and finance. Unit cost of each of these items can be reduced by spreading them over a larger area. You can also look to cut costs by renting large machines only when they are needed, planning operations to minimise overtime or using temporary labour.
The options are infinite. The key is attention to detail to identify how your costs are currently structured. This should be the foundation for all your subsequent activity.
How much do you spend to produce each tonne of grain on your farm? A quick calculation could help pinpoint opportunities for savings, advises Simon Bennett of accountant Deloitte & Touche.