Skill versus scale

cows-feeding

Highlights

  • Farm size matters when it comes to maximizing profitability, but bigger isn’t always best
  • Efficiency is key to becoming an above average farmer and should be established before considering expansion
  • To see how you’re doing compared to other farmers, generate a financial map for your operation and compare your numbers against sector benchmarks

Farm size matters when it comes to maximizing profitability, but bigger isn’t always best. Skill and management ability are every bit as important.

Roger Mills, a dairy business consultant from Steinbach, Man., says his benchmark comparisons show the most efficient producers are between 10 and 15 times more profitable than the average. Furthermore, this profitability advantage holds true whether you’re discussing smaller or larger operations.

These numbers reflect a fairly universal trend across the world. John Roche, an international dairy consultant based out of New Zealand, says that at prevailing prices, the average dairy farmer in the United Kingdom would need to milk 413 cows to earn the average national wage. The top quarter of farmers would need to milk only 53.

If you aren’t efficient at the size you are currently, it doesn’t matter how much bigger you’re going to get, you’re not going to become any more efficient.

“When prices drop, only the top 25 per cent are making money,” Roche says. “So do you need skill or do you need scale? Because I can assure you that losing $1,000 a cow isn’t great when you are milking 1,500 cows. I would prefer to be milking 150 in that scenario.”

Efficiency is the first step

A well-managed larger operation benefits from economies of scale by spreading fixed costs over a larger revenue stream, Mills says. However, they need to be very efficient before they consider expanding. “It doesn’t do you any good to try and get bigger just for the sake of getting bigger,” he says. “If you aren’t efficient at the size you are currently, it doesn’t matter how much bigger you’re going to get, you’re not going to become any more efficient.” The advice is valid no matter the country or sector of agriculture.

Managing debt level is critical to efficiency, Mills says. He’s adamant that the producers he works with devote no more than 30 per cent of total gross revenue to servicing debt. Exceeding this level can put a severe strain on the business.

In Canada’s supply-managed dairy sector, producers need to maximize their quota fill if they ever hope to reach optimum efficiency. If you base cash-flow projections on a 98 per cent fill rate, you’ll be in trouble if you operate at only 85.

“Putting up quality forage and balancing the ration with supplements or concentrates helps optimize yield per cow,” Mills says. “Paying attention to details like breeding and heat detection are very important, even when you get busy in the summer. They make a big difference to your operation in the long term.”

Are you an elite producer? Benchmark to find out

“If I stand in a room with a group of farmers and ask, ‘who here is an above average farmer?’ every hand will go up,” Roche says. “If I ask who is a below average farmer, every hand will stay down. People don’t like to consider themselves to be average.”

If you work with a financial professional to analyze at least five years of your farm’s financial records, you can generate a financial map of your operation. Then when you compare them against sector benchmarks, you can see how you stack up. If you don’t fare well, you can look for where the anomalies lie and where improvements should be possible.

Being average is no longer good enough, Roche says. Farmers need to strive for improvement until they join the elite, because the best farmers have the required resiliency to remain profitable through financial storms.

A different measure of success

Past generations were prepared to work for the sake of work, Mills says. But when the present generation gets married and has children, they want to take part in family life too.

Last year, Roche met with a group of dairy farmers from the Waikato in New Zealand. The weather was terrible so they spent three hours talking in one producer’s milk shed. His financial information showed he was 30 to 50 per cent more efficient than most farmers and his profits ranked among the top 20 per cent of his benchmarking group, so most of the discussion revolved around why he wasn’t pushing the envelope to produce more milk and potentially make more money. Roche was deeply moved by the answer.

“The farmer said, ‘I want to spend more time on my boat with my wife and my three young children during the summer, rather than on the tractor feeding cattle. I’m making more than enough money doing what I’m doing.’”

From an AgriSuccess article (May/June 2016) by Lorne McClinton (@LorneMc).

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