Why it will pay to realise that bigger is not always better
Comment Brian Henderson
It’s difficult to avoid the temptation to succumb to a feeling of satisfaction when something you’ve felt for years is finally recognised and filters into the mainstream. And when a leading farm consultant gave a presentation on the need for arable farmers to make sure they did their calculations before heading into another round of expansion, I got that feeling.
It wasn’t that expansion in itself was a problem, it was just that many arable units went down this road while failing to do some pretty basic sums.
At its spring seminar last week, Andersons the Farm Consultants said for businesses suffering from high costs, poor margins and low profits, expansion was often as much the cause of their problems as the answer, especially where the cycle ran like this:
Low profits need to be addressed so a period of expansion is entered into to gain economies of scale. But this generally involves taking on short-term leases on land at high expense and often at considerable distances from the core area.
More travelling is then required between land and, in order to cope with the additional acres, more and/or bigger machinery is bought. To cover these costs, output must be maximised, so variable costs of fertilisers and sprays also rise.
A side-effect of larger areas and more distant plots tends to be a degree of management overstretch, a factor which tends to confound the desire for improved efficiency, leading instead to
0 Farm machinery seems to get bigger every year disappointing yields and poor returns. Perversely, while it seems obvious that such an approach is likely to land the business with lower profitability, the response is often to “keep on doing what we’ve been doing” and take another trip round the cycle, amplifying the effect even further.
To be fair, though, there are often other drivers for expansion – and the desire to have the biggest tractors and combines covering the largest amount of land probably plays its part.
In the dog-eat-dog world of business, the endgame of such a desire might be to be the last man standing in the game of farming Monopoly which is under way in many arable areas. But the easy gains and profit levels are no longer there to underwrite such disregard for financial management.
However, while we farmers often appear to be slow learners, Andersons said more producers were catching on – and were beginning to look at how much money they were making from working plots many miles away. Some were even realising that they were doing this for precious little reward for the time and effort spent on the extra land.
There was also a growing recognition that the underlying tendency to push yields “at all costs” was no longer costeffective either. “More yield is better than less, but only when the cost of producing it does not exceed the sale price,” as Andersons said.
Indeed, the consultant also highlighted that it might be logical to leave some areas uncropped, rather than spending money on inputs aimed at squeezing out the sort of returns that poorer areas simply could not achieve.
For many businesses the loss-making nature of pushing every acre is masked by the profits created on the better land or the income generated by other parts of the business, including the enterprise of collecting support payments.
If performance isn’t gauged, effective management is difficult – but technology is now widely available to help identify where the costs of growing a crop outweigh the income it can generate.
The consultant noted that it was fascinating to see the shift in management and approach once the underlying patterns of yield variation and associated uneconomic costs of production were visible.
Part of the challenge for the industry will be to understand yield variation in farms and individual fields and to use this information to set up businesses in a way which can increase profits.
The bigger challenge will be changing the mindset that bigger is always better – and realising that less is sometimes more…