Sheryl Haitana
Profitability will gain even more importance for dairy farmers with new environmental regulation coming in and building pressure from banks, Agfirst agriculture economist Phil Journeaux says.
Table mortgages used to be norm until pressure in the 1990s saw many banks give farmers interest-only loans, which quickly became standard. The banking industry has now gone back to the future and is asking farmers to pay more principal back as well, he says.
Farmers looking to extend their overdraft and borrow more money will have to show a budget to their bank manager to show the business can handle a table-mortgage-based loan.
“There has definitely been a credit tightening, and it’s one thing, A, farmers will need to start to live with and, B, is the key driver why you need your farm to be as profitable as possible.”
With freshwater and greenhouse gas emissions on the agenda, farmers can also expect an impact on their farm costs, and/or income in the future.
“Profitability is key, and with all the environmental pressures coming on you obviously need to be profitable to pay for the capital expenditure that many farmers are looking at.”
The key indices to monitor on a regular basis for profitability, are economic farm surplus, return on farm assets, profit margin and farm working expenses proportionate of farm income.
It’s important to calculate these on a per hectare basis to get a better indication of a farm business performance, Phil says.
“I’d say the difference between top farmers and average farmers is they monitor these things on a more regular basis and they do budgets, including cashflow budgets.”
Part of being a good businessperson is prioritising these key indices amongst the multiple data farmers have at hand.
“There could be 1000 indices with farming, it’s knowing the top three to five key ones that you keep up with regularly.”
There is increasingly sophisticated financial and farm management software for farmers to use, and farm consultants can also help farmers monitor key indices, he says.
Not many farmers would do a regular cashflow budget, he believes, but it is essential to be on top of what money is coming in and going out of your business.
“The average farmer might look at their annual accounts and think ‘that’s interesting’ and then get back to farming.”
Keeping a closer handle on your budget during the season puts a farmer in a better position to make timely decisions, Phil says.
“The old joke is the difference between a good farmer and a bad farmer is two weeks. If farmers know their income, know how their farm working expenses are tracking, that allows them to make decisions.”
If farmers are on bimonthly GST, it also helps them keep their figures up to date for their budgets.
“You’re keeping an eye on it much more.”
Another stand out for the most profitable farmers is they benchmark themselves, Phil says.
Without benchmarking, farmers really don’t know if they’re performing well or not.
Key indices to drive profit:
- Economic farm surplus/operating profit
- Return on farm assets
- Profit margin
- Farm working expenses proportionate of farm income.
