Take baby steps to bigger profits
- A 5% improvement on yield and on marketing and a 5% decrease in costs can add not 15%, but 117% to your bottom line
- Consider using an agronomist and a marketing service, and know your cost of production
- Switching to accrual accounting can be a big help in forward planning
Why can 5% improvements be a big deal?
The analogy I start with is a baseball analogy. A .300 batter versus a .250 batter is just one more hit every 20 at-bats. It doesn’t sound like much, but when you replicate it over a season or over generations, it can really add up. In the canola farm example (see chart), if you were to make a 5% improvement on yield, a 5% improvement on marketing and a 5% decrease in costs, in theory that should only be a 15% improvement, but it’s actually 117% more to your bottom line.
“The biggest thing is to have a plan, know your cost of production. If you always lock in profits, it’s really difficult to go broke.”
So how big is that in a typical farm commodity?
Well, the example farm had a profit of $50 an acre. Doing three things 5% better made it $108.50, so in a year they make more than double. If you draw 50-mile pockets in Western Canada, there are a lot of farms within those pockets where there will be one farm making $100 an acre more than his peers, so the 5% difference can be huge.
What can you do to get 5% better yield? Going from 40 to 42 bushels per acre doesn’t seem unattainable.
good relationship with your agronomist can really help. Is there a better macronutrient package? Have you ever used potash? Are you using the right blend of products together? Do you use seed treatments? How good is the germ on your seed? Have you looked at thousand kernel weight?
What about the marketing side? Everyone likes to think they’re doing the best job possible.
Education is key. How many people actually have the education to understand futures, options, cash contracts, basis contracts, and know when to roll the basis contract?
Marketing services can really help some producers. Others are born to be good marketers. The biggest thing is to have a plan, know your cost of production. If you always lock in profits, it’s really difficult to go broke.
On the cost side of the equation, it would seem a little counterintuitive because we’re talking about investing in more inputs, but the volume of inputs isn’t the only thing.
I’m a huge proponent of using more inputs. It’s a direct correlation to your gross margin in most cases. However, small improvements such as sectional control on our farm led to an eight per cent decrease in inputs with no change in yield.
What is our overlap difference on autosteer? Can you get 24-hour shifts because of autosteer? We talk a lot about labour, power and machinery. What is your real depreciation? What are wages to third parties, fuel, custom work, leases, the cost to get it done? That number can vary by $100 an acre from one farm to the next.
So, two farms could grow the exact same number of bushels side-by-side and sell for the same price, and one neighbour would make $100 an acre more than his peer simply because he is more efficient. The question to ask is this: How many more acres could I farm with my exact same equipment line plus or minus one human? It’s the easiest way to find out if you’re over-equipped.
You’re a big advocate of accrual accounting so producers know what’s going on financially. Please explain.
I wish accountants, consultants, insurance agents and bankers would force it upon agriculture. I think it would be the best change we could ever make, comparable to the switch to direct seeding in Western Canada. The first two years are not much fun because no one understands, but after that it completely changes the relationship with lenders. It enables forward planning because you know with certainty how your farm is performing financially. Knowing your debt-to-equity ratio and debt servicing ability completely changes how well you can plan for the future.
|Example Canola Farm||5% Improvements|
|Canola Yield||40 bu/ac||42 bu/ac|
|Price||$10.00 /bu||$10.50 /bu|
|Gross Return||$400.00 /ac||$441.00 /ac|
|Total Costs||$350.00 /ac||$3332.50 /ac|
|Net Return||$50.00 /ac||$108.50 /ac|