Business strategies
What do the top performers from each farm sector do to achieve the highest interest return on total farm capital employed, and what does the rather gloomy sounding ‘misery index’ say about the farm business? Stuart Ford outlines the key points from the recently published Brown Glassford’s Farm Survey.
The key points from the Brown Glassford/ Alexanders Farm Statistical Survey 2018:
1. In the irrigated dairy farms sector, the answer to excellent financial performance is to have very tight control over your expenditure.
2. For the dryland dairy farms, the answer is apparently all about scale and output per Ha.
3. In the arable sector, it is all about maximising the gross margin from the cropping regime either by controlling costs and/or maximising revenue.
4. For both of the sheep and beef farms, the answer to a high net profit is controlling expenditure.
I have just received my copy of the excellent Farm Statistical Survey 2018 from our outstanding accountants Brown Glassford and Co. The survey is a summary of all the actual results from their farm accounts and it is joined with the same results from Alexanders, another outstanding rural accountancy firm which is also based in Christchurch. The majority of the farms that contribute to this survey are found in the top half of the South Island. You can access a copy of it from the website of Brown Glassford and Co.
I always love reading it because it is absolutely packed with statistical data about farming, 44 pages of it. Which is exactly why I suspect that it is not read very widely. So the following is my short summary of what I see to be the key points that come out of the survey.
The farms are divided up into farm types and the average result is reported across each farm type. Then this average result is compared with a benchmark result which reports the top 10% of performers ranked on the interest return on total farm capital which is in my opinion the ultimate measure of success in farming.
One of the measures reported is the “misery index” which is a measure that was dreamed up by Pita Alexander which is a very quick indicator of how well your farm is structured and performing. It is described as the sum of the FWE to GFI ratio and the interest and/or rent paid to GFI ratio. Where the sum is above 80% it almost invariably means trouble because it could well mean that more than one key benchmark is being broken at any one point in time.
Dairy Farming
The dairy farming data reports irrigated and dryland dairy farms as shown in the following table.
In the irrigated dairy farms category, there is very little difference between the average and the top 10% in terms of production. However, because of the much lower farm working expenses, the top 10% have a much higher overall margin and return on total farm capital. The lesson learned from this is that in a highly controlled farming system where productivity is pretty standard the answer to excellent financial performance is to have very tight control on your expenditure.
In the dryland dairy farms the answer is apparently all about scale and output per Ha. The cost ratios are all pretty similar on a per kg milksolids basis but the more productive farms perform better on the financial measures.
It is interesting to note that even in a season with a relatively high milksolids payout the average irrigated dairy and both of the dryland dairy groups are hovering around that 80% misery index mark. The top 10% of irrigated farms are the only ones which are well below it. That tells me that we must keep a close eye on the key benchmarks because our systems are set up pretty finely.
Arable
The key results from the Arable sector are shown in the table below.
In the arable sector it is all about maximising the gross margin from the cropping regime either by controlling costs and/or maximising revenue. As can be seen from the table above, the top 10% of farmers have a considerably higher gross margin than the average. This results in them having more than twice the return on capital than the average.
The average arable farm just exceeds the misery index while the top 10% is well under it.
Sheep and Beef
The sheep and beef sector is divided into two sectors: flat and downland which I have called intensive in the following table and hill country which I have called extensive in the following table.
For both of the sheep and beef farms the answer to a high net profit is controlling expenditure with both of the top 10% farms having significantly lower farm working expenses than the average. The top 10% extensive farms invest the lowest amount of capital while having the highest return on total farm capital of all of the farm classes reported in the survey which may say something about the wise investment in capital in some of the other highly capital intensive land uses. The average of both intensive and extensive sheep and beef farms sit quite comfortably inside the misery index.
