Measuring to ensure good management

23 Feb, 2014 01:00 AM
Esperance farmer and Nuffield scholar Matthew Hill believes money isn't the only gauge on success.
You really have to understand what is fundamental and important to you in your business.
Esperance farmer and Nuffield scholar Matthew Hill believes money isn't the only gauge on success.

"YOU can't manage what you don't measure."

That was the key message from Esperance farmer and Nuffield scholar Matthew Hill during his presentation on farm business management success at the GRDC Farm Business Update in Merredin last week.

"If you're not measuring success and you don't put a value on it, you just don't know what you are doing," Mr Hill said.

"You really have to understand what is fundamental and important to you in your business and measure it year-by-year and against your neighbours or peers.

"That way if you do make changes you can measure whether it is successful or if those changes are detrimental."

Mr Hill and his wife Angela are in partnership with Angela's parents and brother, and operate Young Hill Farms, a 13,000 hectare cropping and livestock operation.

He began farming in the Esperance region in 2002 when the family expanded from 4000ha to include a leased neighbouring property of 9000ha.

And according to Mr Hill a fundamental concept of measuring success was to first define it.

He said while the definition of success was not universal, money alone was not an accurate gauge.

"Money is fundamental to success because you have to have enough money to live, but having heaps of money is not necessarily the key to a successful life," he said.

Mr Hill said he measured his personal success on a number of other factors, including a happy marriage, running a profitable and sustainable farm, and educating his children.

But from a farm business perspective, he said key performance indicators and benchmarking against others was the best way to evaluate a farmer's current position and to track progress.

Mr Hill said there were a few key components that he considered important to farm business success including equity, yield, commodity price, scale, cost management, relationships, communication and rainfall.

Interestingly, Mr Hill said he didn't believe rainfall was a good measure of farm business success.

"While rainfall is fundamental to farming, it is not fundamental to farming success," he said.

"We focus on rainfall, but really good farmers make money whatever circumstances they find themselves in. For the rest it is just an excuse sometimes.

"Is your crop yield related to rainfall? I'd say it is, again rainfall is fundamental, but it is only very loosely related to growing season rainfall.

"There is a broad relationship, but it is not very good, yet growing season rainfall is the measure that our management consultants use to measure our success as farmers."

According to Mr Hill it was equity that was the most important measure of farm business health, and it was one of the main considerations for banks and lenders.

Mr Hill said the growth of Young Hill Farms increased the volatility of the business.

He said some tough cropping years, paired with the significant capital investments needed to fill the expansion resulted in poor equity levels.

"We were having some long meetings, did some soul searching and the banks were asking us some serious questions," he said.

"We couldn't fill it for nearly a decade and we battled away to try and get enough machinery and expertise."

He said while the family struggled to manage equity for years, some good seasons had seen improvements.

"We have good income capacity but poor equity and what gets me out of bed in the morning is an aim to improve that," he said.

"Our farm management consultants consider an equity level of 75pc to be comfortable, this is a primary goal of my business and needs to be achieved before I would consider it successful."

Mr Hill said the last decade had illustrated that scale and leverage worked two ways – they were great if they are working for you, but bad if working against you.

"Managing scale is about managing risks and not letting yourself get balanced off the seesaw," he said.

Having undertaken such a significant expansion, he and his wife had spent the last decade trying to grow into the increased scale of the business.

Mr Hill said there were significant advantages to increasing scale including better utilisation of capital and machinery, lower overheads and fixed costs, a better spread of geographical risks, better use of labour and increased affordability and access to specialist and expert services.

On the contrary, he said growth in scale increased volatility in farm performance, meant a reduction in flexibility and timeliness of farm operations, and had incurred a greater administrative burden.

Mr Hill said commodity price was fundamental to the profitability of any farming enterprise and was crucial to the success of farm businesses.

He said it was important for growers to have a basic selling policy that allowed them to manage risks.

"It is often said that farmers are price takers and not price makers and that is fundamentally true, but there are things we can do to manage that," he said.

"Forward sales gives us the ability to manage the price risk a bit and it's something we should use as a tool and set that price as much as we can."

He said Young Hill Farms used to forward sell grain and would try to hit price targets, but had since changed their philosophy.

"What happens is you never sell, you are just trying to achieve the impossible and that is to pick the top of the market," he said.

"For us it's about psychology and momentum."

Mr Hill said Young Hill Farms set a time-based selling program, where they sold 20pc of expected long term average crop before seeding which could be 18 months to two years prior to harvest.

"Then we just keep selling as we go along and if the price isn't good and we are spinning the wheels we might not sell much of it, but our basic goal is to sell a little bit all the time," he said.

"You just get used to it, it becomes part of your business, that is the psychology side and when you are selling it all the time momentum comes.

"When the price goes up you are just selling that extra 100t, it is not a big decision for us, it just becomes straightforward.

"If you wait for the magic $300 a tonne it is entirely possible that you will sell nothing."

Mr Hill said they assessed the season post seeding and sold 40-60pc of average yield by September.

And before harvest they made a realistic assessment of the crop, and if the price was right they would have 80pc sold up until the header was in.



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