Financial success in farming can be narrowed down to price, yield, size and costs, and the adage 'a dollar saved is a dollar earned' can be true when it comes to costs.
Most farm cost structures have four or five of the main inputs making up about 80 per cent of the variable costs.
Fertiliser, chemical, machinery and labour are the big-ticket items in cropping and if any savings are to be made, then we should start with the major inputs first.
Before starting, it is important to have the concept of the law of diminishing returns firmly in your mind.
This law implies that as you increase the input, the production will increase to the optimum point, then on to maximum yield, then excess input can cause the production to decline. Knowing where optimum production is likely to be is a moving target when you are unsure how the season will turn out.
Each year, I source the GRDC Gross Margins Guide drawn up by PIRSA so I can brush up on enterprise profitability in low, medium and high rainfall zones.
Gross margins capture all the income then deduct the variable or enterprise costs. While machinery and labour may be similar across some crops, it frustrates me to some degree that they are not included in their gross margin calculations.
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The best operators would know what it costs per hectare to use their harvester, including both time and use depreciation plus ownership and running costs.
I have long held the belief that the best way to get a handle on machinery costing is to run it as a separate business within your farming structure. Each year the internal contract rates for each piece of equipment are changed accordingly. By doing this, you can ensure machinery purchases are made at the right time for the right reason.
Likewise for labour, having an internal or proper charge out rate may lead to farmers making better decisions, particularly if comparing cropping and livestock enterprises. It is important to compare 'apples with apples' - if full cost accounting was to be undertaken in the cropping enterprises, then the annual cost of the shearing shed and sheep yards needs to considered in the sheep enterprise. After all, they are our wool harvesting equipment.
Production costs are where farmers have the most control, and skimping on inputs usually comes back to bite you. That is why a 'measure to manage' approach is so important. Soil testing, yield mapping, grain quality and the like are important components of the management jigsaw.
As someone who is excited by numbers, I find the measure to manage approach very stimulating because it can increase the options, challenge your decision-making and may take some of the risk out of the game.
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