Farm Finance Blog

Is Your Farm Profitable Enough?

By Jody Padgham

July and August are times of lots of routine work on the farm. Cultivating, hoeing, baling, picking. If our bodies are busy with routine, our minds can wander to ponder bigger questions. I like to take this time to think about my farming goals, to assess if my farm is meeting my longer-term needs.

One question worth a lot of thought is the farm’s profitability. Many farmers can look at their checkbook at the end of the year, and say that they have made a profit on the farm. But, are they sure that the farm is profitable? The answer lies in what goes into assessing that profit. Has the cost of the family’s health insurance, money to allow a vacation, saving for retirement, and/or a college funds for the kids been taken into account?

If not, then your farm, even if it has cash flow and shows a profit at the end of the year, may not be profitable in the long term. A profitable farm allows you and your family to lead a sustainable lifestyle. The majority of farms have someone working off-farm to bring extra income in. This income can be added to the farm proceeds to help balance profitability, but it is also wise to evaluate to farm on its own to be sure that the farm isn’t a drain on the family’s overall profitability or sustainability.

If your farm was not as profitable last year as you’d like, and isn’t contributing to these longer term sustainability factors, what can you do?  There are several things that can improve profitability. Below are things to think about as you go about your routine tasks this summer.

I recommend that you make a list of anything that these options generate as you think them through. This winter when you have in-the-house time you can do research, make some numerical comparisons and see if you might improve profitability by making modifications in how you do things on the farm next year.

  1. Reduce overhead costs. Overhead reflects the expenses that stay the same no matter how much you produce—items such as rent or a mortgage, the cost of equipment or the electric bill. Is there excess equipment on your farm that could be sold? Might it be more cost effective to contract with a neighbor to have your hay made, allowing you to sell that troublesome baler? Equipment must be maintained, and depreciates. Although it can be a joy to own, too much can suck up profitability.

Consider renegotiating lower rates on long-term loans, if you haven’t done so already. Assess what buildings you are using, and how to condense your operations to reduce heating or electric bills. Consider selling or renting out land that you aren’t using. All of these activities will reduce the cost of overhead which must be factored in when you assess long-term profitability.

  1. Reduce variable costs. These are the direct costs of producing your product. You will gain the most by reducing the things that constitute the largest portion of your costs–labor, or feed, for instance. Are there ways to reduce costs without reducing productivity? Perhaps buying seed, feed or supplies in larger quantities, or putting up a bulk feed bin instead of buying bags? You may also consider cooperating with neighbors to buy larger quantities for lower prices (i.e. cleaning solutions, boxes, bags, labels, twist ties).

How can you and other laborers become more time-efficient? Even if you don’t pay for outside labor, every time you do a job more efficiently, you have that much more time to be doing something else (or to take the kids fishing!). On my farm I ran the numbers and recognized that raising four pens of broilers at the same time was more cost effective than raising two batches of two pens—the labor to take care of double the number at the same time was much less than doing two batches individually. As you perform tasks this summer think of how you could combine jobs, or find time efficiencies. Getting a crew set up, and then cleaned up for 6 hours of work takes just as long as getting them set up for 2 hours of work….

  1. Increase production. Are there ways to increase production without increasing costs? Of course, this only works if you have a market to pay you for increased production. Are there different species or varieties that you could try that have a better feed conversion or growth rate? One trial showed that putting a third row of carrots in a bed between two existing rows increased production by 30%, but didn’t increase labor by nearly that much. Keep your mind open and write down ideas you want to explore when you have inside-time. Watch out for incorrect assumptions, however. Increasing animal numbers or acreage can increase costs of production more than you might think and reduce profitability more than increase it.

Other ways to increase production are to change your product mix to produce items that are more profitable. For instance, perhaps buying in feeder calves would be more profitable than maintaining a cow-calf herd that you have to buy-in hay to feed. Or, those with lots of labor available from family can consider growing more high labor, high income items such as green beans, rather than lower income, lower labor items such as salad greens.

  1. Increase Prices. Although not an option for commodity producers, those marketing direct to consumers may have the option of increasing prices. There are many factors to take into account when setting prices, the most important covering costs of production. And, too, the consideration that increasing prices too high may lower the number of items sold, for a lower net profit. However, one simple adjustment that can be made is to pay attention to Retail Price Points. A concept used by commercial retailers for years, this is the odd but true reality that consumers don’t really notice price differences at specific price barriers. For instance, how often do you see something priced at $1.86, versus $1.99? Retailers have learned that the average consumer will buy just as many of an item priced at $1.99 as those priced at $1.86, and so mark the higher price to gain extra margin. Taking advantage of this quirk in human behavior can add to your profitability. More on pricing, and a table listing Retail Price Points can be found in the MOSES book Fearless Farm Finances.

There’s nothing like a 4 hour stint of weeding, or 12 hours in the tractor seat to generate good thinking time. This summer, I hope you use it to consider ways to increase profitability on your farm.

Jody Padgham is the Financial Director for MOSES, and Associate Editor of the Organic Broadcaster.

 

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