Management is ‘the process of dealing with or controlling things or people’ (Oxford Dictionary).

The 2023 season has highlighted what we knew was occurring in 2021 and 2022 but was covered over by exceptionally high income. The cost of farming has jumped alarmingly.

Such an increase in costs not only erodes profitability but increases the break-even yield and price requirements for all operations.

Looking at 2023 results for the northern half of the state, which mostly had a poor production year, it is common for approximately the same or more income to have been generated than in the last poor year of 2019 only for the losses to be substantially worse due to increased costs. Specifically operating costs in 2023 averaged about 150% of what they were in 2019. In dollars that is commonly $150 – $250/ha.

On top of this interest rates have gone up some 4-5% on average and machinery investments are 150–200% of what they were only a few years back. If you are leasing land, it’s likely this has gone up too and I don’t know too many whose personal requirements/expectations have also not gone up – especially on the back of such a good run of seasons.

What has bothered me about the increased costs though is the attitude of acceptance or dare I say, ‘poor me’ that some have! Such an attitude serves no purpose. Unless you plan to exit then managers you need to lift your game – you need to crack in and manage. You need to control what you can, not moan about what you can’t!

One thing our consulting team has observed over the annual review and budget season is that for many ‘below average’ performers who have perhaps been getting by are all of a sudden faced with budgeting on a substantial loss in 2024 even at average crop yields and prices. The combination of reduced income due to the livestock price downturn, high costs, high interest rates on increasing debt, high HP repayments due to all the machinery purchased recently, and often extra drawings adds up to needing a well above average season just to break even. This is most definitely not a good outlook for any
business.

I put to you that the time is nigh for such businesses to change – clearly keeping on doing the same thing won’t produce a different result. The management requirement here is high?

You may ask where to start and of course the first place to focus is income as the best way to cover extra costs is to generate more income.

You need to be thinking through crop v livestock area, rotational mix, varietal choices, stocking rates, time of lambing, seeding plans (trigger dates and circumstances), input requirements, etc. Essentially the big income levers. As you think through all of this and identify what needs to be changed it is quite likely you won’t be able to implement all the changes in one season – that’s ok. Plan to do so over 2-3 years which in doing so will decrease risk and increase the chances of success, especially if the changes are many and complex.

Of course, an experienced independent agronomist can do more than just tell you how to kill weeds will be invaluable with such decisions. Do you have such a professional at your disposal?

On the expense side of things, and for high expense businesses, there is never just one single expense area on which to focus. To manage costs lower requires effort and discipline across all expense areas. It is also worth acknowledging that for some businesses you will need to spend more on some things to generate more income. You just need to identify what these are. For example, you will need to spend more on seed, diesel, chemical, fertilizer, etc to put in more crop.

But such investments aside, there is plenty you can do to manage high costs, but I suggest starting with a hard-nosed attitude.

For every dollar of possible operating expense ask yourself is it essential or just nice to have/do?

If essential, then do it. If it’s just nice then perhaps don’t?

Because there has been such a good run of seasons and thus profits lots of non-essential expenses have crept into businesses. Lots of ‘nice stuff’ has been bought or carried out.

Shop around. As a rule, farmers are just too nice and loyal. You need to understand that all suppliers are in the margin game. They buy products and sell them at cost plus a margin. Increasing margin and selling to loyal customers is the easiest way in the world to make money or more money. It’s your job to keep them honest! Also, for your ‘loyalty’ do you honestly think this means you are getting the best possible deal?

The really obvious areas where this applies are with chemical, fertilizer, and general farm merchandise. You have a wide range of suppliers all wanting your business, and your supplier won’t want to lose yours, so make the most of this.

Finance costs – we’ve written a lot in the past about finance costs and as a rule we’ve seen ‘margin’ creep across the finance sector. The base cost of funds measured by the cash rate and bank bill swap rate is about 4.3%. The ‘average’ margin is close to 2%. You be the judge as to what you are paying!

Again, there are other banks wanting your business!

By the way, just a quick maths example. Every 0.5% on every $1M is $5,000. How much are you borrowing and what are you paying compared to the average margin example of 6.3%?
What about plant and equipment? This is of course complex, but I do find it interesting that the single most obvious way to reduce the cost of ownership is often the last thought of. Keep it for longer! With depreciation being the largest component of the cost of ownership then keeping the tractor for another two years or 1,500hrs will cost a lot less than the first two years you owned it. Just a thought!

Personal – this can be a difficult area to challenge and if you are making good profits and meeting business objectives then pay yourself what you want. But, if you are not then maybe, just maybe look at this area too?

I know I’ve only dived into this complex area of farm management in a relatively shallow way, but I hope you can see my point and remember that as your partners in business we are here to help. We see plenty of businesses so have a good feel for what the successful ones do. We also have team members with plenty of farm management experience including some very recent.

Most of you have been very successful also often over a long period of time and through lots of ups and downs. So, whilst the current circumstances are unique in their own way they are just challenges and if you set your mind to it these challenges can be overcome. But let’s not kid ourselves and think that anything but excellent in management is required to be very successful. This applies to all forms of business including farming!

If you crack in and manage then my good luck wishes will, I am positive, lead to a better outcome whatever that may be.

Good luck!