Skill versus scale

  • 3.5 min read

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 common trend across the world. John Roche, an international dairy consultant based in New Zealand, says when prices drop, only the best managers are making money. 

Efficiency is the first step

A well-managed larger operation benefits 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.” His advice is valid no matter the country or sector of agriculture.

It doesn’t do any good to get bigger just for the sake of getting bigger.

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

“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.”

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.

A different measure of success

Roche met with a group of dairy farmers from the Waikato in New Zealand. One producer’s financial information showed he was 30 to 50 per cent more efficient than most farmers with profits ranking among the top 20 per cent of his benchmarking group. When asked why he wasn’t pushing the envelope to produce more milk and 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.’” His skill, rather than scale, is generating both the profitability and lifestyle he desires. 

From an AgriSuccess article by Lorne McClinton.