Farmers must find optimum margins

Farmers must find optimum margins

COMMENT
Opinion
One of the most common decisions where the law of diminishing returns comes under the spotlight is when nitrogen fertiliser is applied.

One of the most common decisions where the law of diminishing returns comes under the spotlight is when nitrogen fertiliser is applied.

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Early in an individual's farming career, the relationship between inputs and outputs takes on great importance, and if they want to succeed, it is imperative that this relationship is continually placed under the microscope.

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Early in an individual's farming career, the relationship between inputs and outputs takes on great importance, and if they want to succeed, it is imperative that this relationship is continually placed under the microscope.

Business - regardless of what type of business it is - is all about margins. It is about making the optimum margin and duplicating it as many times as you can.

The relationship between costs and returns is not linear, so it is important to understand the law of diminishing returns.

In almost all situations, the first third of inputs gives a good response, the second gives a moderate response and knowing what the final third of the inputs will achieve becomes the skill of good managers.

With many of our farm decisions dependent on the weather, where the optimum response lies on the curve in most cases will be determined more by the rainfall than the amount of the input.

The word is optimum, not maximum, and knowing the difference is critically important. Optimum is where outputs exceed inputs and as you move from that point to maximum you are spending more and receiving less.

One of the most common decisions where the law of diminishing returns comes under the spotlight is when nitrogen fertiliser is applied.

Recorded data, knowledge, experience, intuition and wisdom go into decision-making and in my opinion a success rate of seven out of 10 or higher is needed to justify a decision.

Most of these decisions are made by gut feel after years of experience. Gut feel can never exist on its own, I believe it starts in the brain and leaks to the gut. Without some form of prior experience, gut feel is just a guessing game.

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Forty years ago, agronomists French and Schultz developed potential yield and stocking rate models. While not foolproof, these models did make producers look hard at the factors that made up the gap between actual and potential performance.

In the case of stocking rates, they devised that the potential stocking rate was 1.3 dry sheep equivalents for every 25 millimetres of rainfall that fell over 250mm. So, in a 500mm rainfall area, the remaining 250mm is divided by 25 to arrive at 10, then multiplied by 1.3 to arrive at a potential stocking rate of 13 DSE a hectare.

A considerable number of graziers in the 500mm rainfall zone would be stocked at 8 or 9 DSE/ha and the thought of going to 13 was deemed rather risky.

The real aim of French and Schultz was to not necessarily go the whole way, but to make an improvement on existing levels. After all, stocking rate remains a significant profit driver.

The downfall of the potential yield and stocking rate models was when extremely wet or dry years were experienced. We all know that it is not necessarily how much rain we receive, but rather when it falls that counts.

So, the question remains, were the French and Schultz models a waste of time? I don't believe so, as anything that challenges your thinking and ultimately leads to a sustainable improvement in production must be worthwhile.

If the model breaks down at the extremes, but there is considerable scope in between, it is worth a try. Knowing where the cut-off points are remains the key skill and that can only come with experience.

  • Details: kensolly@rbm.com.au

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