Business yield or profit is becoming the holy grail when it comes to assessing farm values, their “investability” and their likely overall sustainability.
ANZ acting Southern general manager for commercial and agri business Mark Grenside says strong profitability is paramount and provides security, flexibility and options for farmers who, like most businesses, are facing changing times.
The stronger your business resilience the more choice you have around reinvestment in your asset base, debt repayment or what you take for your own personal use.
Being future ready means understanding your asset, its productive capacity and the regulatory environment it must operate under are all important first ports of call when it comes to assessing whether your farming business is set up to optimise performance and profit, he says.
“This starts with how well do you understand your soils, your water availability – rules around it and future risks to it, climatic factors and risks, your property rights and the rules around them?
“In many regions now, your nutrient budget is just as important as your financial budget.
“It’s got to be considered up front and in a lot of cases will be a major factor in determining your direction and what your farm’s productive capacity is.”
Not understanding the farm’s productive capacity can mean you’re leaving productive returns on the table or you’re spending too much trying to achieve performance that’s not realistic.
“If you don’t understand the regulatory environment and where it’s heading, you’re exposing yourself to future risks and could be locking yourself into a system that’s going to be expensive to back out of.
“Our top farmers are very aware of these – they’ve got their heads up looking to the future and in a lot of cases they’re embracing the changes.
“Often what’s good for the environment, for instance, is good for the bottom line as well. They can see opportunities.”
The productive capacity of the operation is important because as well as going a long way to determining value it also determines income.
The revenue line is one that probably doesn’t get enough of the right sort of attention by most people, Mark says.
“We’re not talking pushing production here. We’re talking about smoothing returns and managing income.
“Milk returns can vary by $3/kg milksolids (MS) and have a much greater impact on profit than tightening up on costs and while cost control is paramount, it’s going to give you benefits of anywhere from 20, 30, 40 cents.
‘Our top farmers have costs at the centre of their thinking and stay disciplined so they achieve the margin they target and they do all this while being sustainable across all beach heads – people, environment, animals.’
“Milk price can have five to six times more impact than any other line in the budget but despite that we haven’t yet seen a lot of people managing their income risk and hedging their milk income.”
Mark says coupled with cost control, a good hedging policy can bring more certainty and stability to profit levels.
Knowing your contingencies, having a realistic view of what these are likely to be, their magnitude and then preparing well for them is important.
“We see people underestimating these. They know they’re coming but still they’re surprised when they happen and they haven’t prepared so they hit the profit and loss accounts hard.
“They’ll say they have it covered under repairs and maintenance but haven’t factored in the true cost of replacing some of these big-ticket items like pivots.”
When you look at what top performers do to optimise business performance and drive profitability Mark says two factors stand out – taking personal responsibility and discipline.
They define the essential rules they live by within the business.
“Take responsibility for making a profit. Sit down and work out the business and personal objectives for the year or the farming period, set the budget, plan out the cashflow, know what the targets are onfarm and have the plans and systems well thought out on how you’re going to get there.
“Then stick to the plan, monitor it, act quickly and decisively – own it.”
Think about and define the rules you live by within the business.
Top performers begin with the end in mind and have a clear sense of purpose so they know what they want out of the business.
They communicate their plans and bring their people along with them.
They’re disciplined in carrying out their plans and execute them well on a consistent basis.
“Often in changing times people can become less focussed and erratic, chasing their tail.
“Innovate sure, tweak some things but many are tempted, when the milk price is up, to experiment on things that erode focus and business margin.
“They move away from the basics or dabble in a part of the business they don’t have the skill in.”
Highly profitable farmers understand their numbers and have strong financial control and understanding.
“Know your break-even milk price, your debt repayment target, your peak overdraft requirements.
“What’s the return on investment you’re aiming for, your operating costs, your EBIT.”
Also know your physical farm targets and make sure others on the team know them too.
“What are your targets for pasture cover, residuals, your round lengths, body condition scores, six week in-calf rates and what’s the plan for achieving them?”
Often the best businesses have a cohort of peers who challenge and stimulate them to be excited by the small detail that creates strong performance, he says.
“You should be interrogating your costs and plans but have others do that too. Use people who can appraise the link between what you’re trying to achieve financially with the physical farm piece.”
Top clients often think of business as a marathon not a sprint, they’ve got a plan and they break it down into sections.
“They’re focused and have the discipline to execute the plans right across the business from how much grass they’re growing, how it’s managed, their cows and young stock, their financials, right down to how clean the shed is.
“But they simplify those plans and expectations and manage their people in a way that they’re completely engaged with those plans too.
“They’ll often have a philosophy of keeping machinery to a minimum but they’ll look after what they have.
“They’ll be resourceful, fix things themselves – they love farming and what they do.
“So while there’s a lot of detail behind what they’re doing, they have simple repeatable systems that are grass-based with few moving parts.
“Maximising pasture eaten is a standout. Our figures show a very strong relationship between that and profit.
“Our top farmers have costs at the centre of their thinking and stay disciplined so they achieve the margin they target and they do all this while being sustainable across all beach heads – people, environment, animals.”
Farmers’ sentiment has been dragged down by some of the headwinds in front of them but the big picture is positive.
Global demand for food protein is still growing with population increases and shifts in socio economic levels.
The gap in food protein left by China’s pig population decline is likely to boost that demand although there could be bumps in the road from issues such as those emerging with the Coronavirus outbreak.
“There is an overall positive outlook though with New Zealand having a great safe, nutritious agri food story to tell.”
Mark cites lessons from adventurer Jamie Fitzgerald who together with Kevin Biggar was hit by a storm during a trans-Atlantic rowing race.
They kept rowing despite the storm stopping them from making headway.
After 42 hours the storm abated and they got the message from their team manager Rob Hamill.
“Whatever you’re doing keep doing it.”
Despite essentially staying still they were leading the race because others had thrown out their sea anchors, stopped rowing and went backwards.
“So keep rowing. It might seem like there are headwinds but embrace the challenges, there will be opportunities for those who can consistently show good profits and have disciplined well run operations,” Mark says.