THE production costs of farmers in a long-term Victorian study have risen by more than increase in income, putting a squeeze on profitability in spite of elite level production efficiency.
Cropping consultant Harm van Rees said farm management business ORM had been keeping records from 12 Wimmera and Mallee farmers for 16-20 years to demonstrate the changing face of the cost of production.
In that time, over the average, production costs have risen by 89 per cent while income has risen by 82pc.
Of even more concern is the increased exposure to risk, with the average cost of putting the crop in over the study participants rising from $400,000 to $800,000.
Mr van Rees said with leading farmers already producing grain extremely efficiently, the methods to improve profits margins would most likely come from reducing risk and costs, and potentially value adding.
“We’ve made some pretty big advances in terms of production over the past two decades, things such as improved rotations, better summer weed control to conserve moisture, no till and precision agriculture,” he said.
Mr van Rees said research by Zvi Hochman at CSIRO found that while across all farmers there was a yield gap between actual and potential yields of 47pc, this decreased to 21pc across three farms participating in his study to see whether yield gains had plateaued.
“Internationally, the recognised standard is of the economically attainable yield gap is 20pc, so these guys are right up there.”
Mr van Rees said farmers could not rely on increasing yields to boost profit margins.
“Most of the improvements in increasing yield have already been made, there will be slow genetic gains, but these gains won’t be sufficient to increase yield above the rising cost of production, unless something brand new like genetically modified wheat comes into play.”
Instead, he said better risk management strategies would play a big role in helping manage costs.
The much maligned climate forecasting sector will play a big role in that.
“There’s still a lot of room for improvement, but we’ve already seen long term forecasts, with things like POAMA (the Predictive Ocean Atmosphere Model for Australia) get much better and its likely get much better again soon.”
He said growers could already use yield forecasting programs, such as APSIM (Agricultural Production Systems sIMulator) to ground truth their potential investment in in-crop inputs to good effect.
“APSIM takes into account things like soil tests, inputs, varieties, sowing dates and rainfall.
“There is 89pc correlation between APSIM’s predicted yields and actual yields, so we can be very confident once APSIM is set up properly for an individual property, it’s a good model, apart from events it cannot measure, such as frost and hail.”
He said another critical plank in improving long-term profitability was decreasing costs.
“The current trend is to try and maximise yields in good years through throwing inputs at the crop, but this is a risky strategy that can expose farmers to big losses in dry years or when there is a frost.
“Farmers need to measure themselves on profit, not on gross production, so we need to clearly measure these input costs and whether they are worth the risk.
“Advisors can also play a role in this – we’re seeing expensive herbicide options such as Sakura and Avidex going out in the Mallee.
“They do a great job, but at $70 a hectare in an environment where yields average 1.8t/ha, it is probably not sustainable.”
“Increasing scale may have a role in diluting machinery costs, but it does presume there is excess capacity, so it is not always an option.”
In terms of generating more income, Mr van Rees said farmers could investigate value adding opportunities, but cautioned such opportunities could be difficult to extract in bulk commodities such as grain.
“The long distance to market means it is difficult to process grain and it is also a capital intensive business, but it is something people could look at.”
Worryingly for growers, in spite of record low interest rates, it is finance costs that have risen the quickest over the time of the ORM study.
“Finance costs have risen by 127pc, compared to inputs, which have gone up by 90pc and machinery, up 88pc.”
Mr van Rees highlighted a potential banana skin in terms of the farm budget.
“It’s also important to factor in owner drawings, people need something to live on during the year, but in too many budgets it is not in there.”