BY: CAMPBELL WOOD
Efficiency – Doing more from less. We hear this all the time everywhere we look, with businesses always looking at ways of trimming out the fat. What does this mean for a sheep farmer?
Farmers in general have been doing this for generations, albeit without the fancy wording around it you hear from the corporates, they have had to do this to survive.
An example is in the past 16 years AgriFocus has been operating, our average operating surplus per stock unit (gross income minus farm working expenses), has grown from $43 to $72 per stock unit. Yes, commodity prices have a lot to do with this, but so does a lift in production measures, with lifts in lambing percentages and carcaseweights across the board.
Now, more than ever, is time to focus on efficiencies in our farm working expenses. Commodity prices in the red meat sector have been very favourable for the past few seasons.
Yes, every year throws its different challenges at us which we can’t control, but this increase in income has allowed farmers to catch up on a few deferred maintenance jobs, but it has also allowed some complacency to creep into businesses with a few extra costs creeping in on the farm, and in the personal expenses.
This is where careful planning needs to come in this season.
Very early days yet, but the outlook is not as rosy as it has been the past couple of years. This means we need to make some adjustments now to ensure we still have a positive bottom line. Cashflow is King, and the problem in sheep farming is it’s generally poor, ie; we spend money for the first six months of the financial year without any income, and then our income comes in over the second half of the financial year.
This is always going to be the case, as we need to spend money to keep the system running which is normally setting us up for the following season, but we need to get a better understanding of how the decisions we make now will impact us later in the season.
If we spend too much now, then if the income isn’t as high as we had expected later in the year we could be left with a deficit.
Gone are the days of making losses and relying on the bank to clear out the overdraft every few years. Some businesses are not reliant on the bank at all, but our clients have gone from an average of $131 debt per stock unit 16 years ago, to $422 debt per stock unit now, however the interest charges as a percentage of income was 17% 16 years ago, and is 15% now, so we are all lucky that interest rates are low, which is helping.
We think the prudent thing coming into the spring is to cut out any of the excess in both the farm working costs and personal expenditure. Maybe we need to put off any of the wish list items for now and pull the repairs and maintenance back to a minimum. There are too many unknowns out there. If the money ends up coming in later on, then maybe carry out those jobs in autumn once you know what your year is looking like.
We also need to start focusing on income per kg of drymatter and how to maximise this. A lamb sent to slaughter straight off mum is going to be more profitable than a lamb held until May or June.
What is the opportunity cost of that grass from weaning to winter? To achieve this people are moving more percentage of their flocks to a terminal ram, focusing on that rapid meat growth and yield to get the lambs away earlier. Also getting the one-year ewes to the terminal and lambing slightly earlier to get those lambs but also the cull ewes away earlier to free up space for other stock onfarm.
This has caused a movement away from the traditional meat and wool breeds, and more into the straight meat breeds. Most farmers are still traditional in their main flock with strong meat and wool, but for how long? We all know where wool returns are.
- Campbell Wood is a partner at Agrifocus who are accountants and farm financial advisers, based in Southland and Otago.
