HOWTOCUTOVERHEADS
HOWTOCUTOVERHEADS
By William Gemmill
EVERYBODY knows overheads need to be kept under control and if possible reduced still further. But just how should farmers go about doing that?
By comparing the profitability of five example farms some useful messages emerge.
The five businesses are all combinable crop farms in East Anglia, ranging in size from 230ha to 1025ha (table 1).
Farm D has only recently been taken on by Strutt & Parker, so final yields and fixed costs have yet to be influenced by the farming team. It has a low gross margin, due to fundamentally low yields (table 2).
All farms in the example have focused on adding value to the final product, with 30-60% milling wheat, ACCS accreditation, attention to detail with inputs and adding value to break crops through seed and human consumption contracts.
Table 3 shows labour and machinery on each farm, expressed as a total and per hectare, including casual labour. The target is 175-250ha/man, depending on the size of the farm. But all farms need a flexible approach to achieve a strong gross margin. The aim on these units is to finish drilling winter cereals by Oct 7.
Surprisingly, the smallest farm has one of the best labour profiles, with 200ha/man. That is achieved through the use of contractors to help during busy periods rather than extra casual labour.
For machinery, all items are included in the horsepower/hectare figure, apart from the combine harvester. The desired range including short-term hire is 1.5-1hp/ha, depending on economies of scale. Once again the use of short-term hire helps get all farms within this range.
It is important to have a restructured machinery replacement policy, so large capital expenditure does not all come at once and so repairs do not become too excessive.
The target for labour costs is about £100/ha. The managed farms in these examples employ a working manager/foreman, so costs tend to be slightly higher. Where the farmer works to provide all his own labour, a value for his own time must be accounted for as a proper overhead.
It is also important to ensure the labour force is well motivated and has a good understanding of the goals being pursued. They need to feel part of the team. The Vocational Training Scheme will play a big role, securing adequate funding for future training, particularly with new hi-tech training such as computer skills.
Machinery and depreciation are taken as one figure. Often where depreciation is high, repair costs are low and where depreciation is low, machinery costs are high. The target for all farms is about £150/ha, which can be quite tough to achieve.
Total fixed costs should be about £350-£400/ha. The farms in the example could still make improvements on this. But it must be remembered that within these costs are the labour costs for a manager/foreman and Strutt & Parkers costs.
The managed profits are all reasonably acceptable, apart from Farm D, where low yields have let down gross margins.
In the cases of the two smallest farms A and B, sundry income has played a big part to help boost overall profits. These figures are not included in the figure for the management profit, but now make up a significant proportion of the total income.
The future policy on all farms will be to continue to add value to all crops grown looking for niche markets, working more closely with both merchants and the end users. Higher yields will be sought, while still optimising inputs.
As seen by the figures, there are still planned machinery rationalisations at the appropriate times, reduce cultivation, past equipment will be purchased and the use of contractors on our smaller farms continually considered.
Ways of enhancing sundry income on farms also need to be pursued, although often this is location driven. Tenant farmers should not be put off and could consider working in partnership with the landlord.
coverage continues on S12
Table 1: Strutt & Parker managed farms
A B C D E Target
Size (ha) 230 275 410 510 1,025
1999 gross margin 685 770 650 520 650
Labour costs 130 120 128 135 105 100
Machinery costs 90 91 82 121 66)
Depreciation 74 128 101 147 88) 150
Total fixed costs 437 481 442 540 317 350-400
Managed profit 248 289 214 -20 332
Sundry Income 191 115 0 0 0
Table 2: Yield comparison (t/ha) 1999-2000
1999 2000 %
S & P S & P Change
ave ave
Winter wheat 9.7 8.9 -8
Winter barley 7.5 6.9 -8
Oilseed rape 3.4 2.8 -18
Winter beans 3.8 3.8 0
Spring beans 4.2 3.8 -10
Linseed 2.2 1.6 -27
Peas 4.5 4.1 -9
Table 3: Strutt & Parker managed farms
A B C D E Target
Full-time labour 1 1 2 2 4
Casual labour 1 2 2 3 4
Hectares/man 200 190 170 165 225 175-250
Tractors (hp) 1×130 1 x170 1 x150 1 x210 1 x270
Long-term 1×100 1×100 1×130 1×150 1×200
1×90 1×130 1×150
2×100
1xSP sprayer
Forklift Forklift Forklift Forklift Forklift
Short-term Contractors 1×200 1×135 2×135
hp/ha 1.4 1.4 1.3 1.2 1.1 1.5-1.0