Reducing risk increases profit

17 Mar, 2015 01:00 AM
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8
 
Production costs have risen by 89 per cent while income has risen by 82pc

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.”

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FarmOnline
Gregor Heard

Gregor Heard

is the national grains writer for Fairfax Agricultural Media
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READER COMMENTS

wtf
23/03/2015 9:43:45 AM

I don't think higher yields are the answer, just a race to the bottom. A premium of $100/tonne for GM free corn is now been had by growers, would that be better in our pocket or the corporates. CSIRO etc have agendas, what amount of GRDC funds are going towards weed recognition technologies and removal? or open pollinated canola to remove the patent cost of seeds? these are just three methods we could reduce our costs and increase our sale price. We cant compete against subsidised systems, we need to run another race. I would love some figures on how much our researchers are spending on these?
Jeffito
20/03/2015 5:07:23 PM

My comprehension is excellent, W. Read the last sentence of the story carefully. Yield increases are required. Agronomy like zero till is fully applied. genetic gain will be slow. A step change in yield is required. The author cites GM as one possible contributor. What other examples can you cite that will provide a major step change in yield? I am not saying GM will necessarily be the answer but I'd love you to provide any other example of a technology that can make a big change.
wtf
20/03/2015 9:50:06 AM

Comprehension not your strong point Jeff? Allow me to explain. There was a reference to GM wheat being our saviour, I do not see patented inputs as our saviour, as evidenced when roundups patent was current and when the Chinese stopped making it for a while. We had a system that worked, now we are at the mercy of that wolf u refer to. If I had a biotech company, I might see that dog u see, I might even see rivers of money coming my way and tell others how they think.
Jeffito
20/03/2015 7:14:28 AM

Wtf, where most people would see that distant four legged animal with a tail is a dog, you always see a wolf. I read the story about the difficulties of making a profit from farming and then I read you letter (twice) and there is a real disconnect between the story and what you write.
dunart
18/03/2015 8:05:16 AM

As long as we have the present economic policy of "inclusive taxation" and an over regulated labour market, this trend will not only continue but get worse! History tells us this.
Invey
18/03/2015 6:26:35 AM

Good to see an honest story about profit. Looks like farming winter grains has no long term future. Costs are still increasing but yields are not. Anyone that farms knows that we are all taking more risk with every season. In my area summer cropping sorghum and corn is nearly unviable. The loss now from a failed crop is just too great, the risk is too great for the tiny potential profits. Poor weather forecasts don't make it any easier.
RCG
17/03/2015 5:17:33 AM

“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.” So True. So many GM's that departments & advisors also put out in the public domain, don't include drawings, finance etc etc - all of these basic omissions end up distorting the real picture of total costs of production. But what would I know - I'm just a grower that runs a couple of businesses that has survived through the toughest of times!
wtf
17/03/2015 4:29:18 AM

I have read plenty of material that casts a big shadow over the CSIRO lately, interestingly GM is being painted as the great saviour of Austn Ag. Does Mr Van Rees remember what the prices were for Roundup prior to the patent ending? or any other herbicide?, or what about when the Chinese weren't making their knockoff at one point?. How can people honestly believe cost of seed will be any different, or the new chemistries they bring. Don't use current GM as your guide, the bones of our once farmer/public funded seed industry have kept them honest till now. What about the TPP and IP impacts?

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