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The critical role of cost control on the farm

Guide Thrive 2015: Upgrading your planning, tracking and benchmarking processes isn’t always easy, but it can put you in charge of your farm’s future

Forget good luck. As a strategy, it obviously has its weaknesses. Worse, it takes your eye off the factor that really makes a difference — how good you are at tracking and managing your costs.

If there’s any luck involved in that, says Drew Fowler of Eyebrow, Sask., it’s a word that never comes to mind when he’s talking to his most successful neighbours. Instead, they live in the same volatile world as other farmers, but their focus on cost control makes them quick to recognize opportunities.

And there’s also more to it than that.

“You can’t control the uncontrollable. A lot of the costs we face are variable, the prices of inputs are highly volatile, and you don’t know from one year to another how bad machinery repairs will be,” Fowler says.

“That said, the producers who I speak with on a daily basis who know where their money goes tend to be in a better cash flow position.”

Fowler and his father farm 3,000 acres of grains and oilseeds, when Fowler isn’t working his day job in ag retail. The combination of experiences has brought him to the conclusion that cash is king.

“It’s easy to put something on credit, but it’s hard to part with cash,” Fowler says, and he has seen how that has an impact on the purchasing behaviour of farmers in either case. Although it’s not something he can manage very easily just heading into his early 30s, Fowler says part of his vision of financial success now includes the ability to pay with cash.

“If you’re using your own cash, you determine what you’re doing with it,” Fowler says. “You don’t have to worry about some financing contract you signed that’s 14 pages deep.”

Sure, in recent years the banks have been mostly happy to accommodate farm expansions of 300 per cent over five years, or cash flow crunches caused by grain transportation challenges. But Fowler says that, as the person who sits down with customers who sign these input financing contracts, he’s become very familiar with all the finer print they contain and cautious about overextending himself.

“Our cash flow will be less next year and our incomes are going to be down,” Fowler predicts. “I’ll be thinking twice about novelty purchases, staying ahead of the game on opportunities to save five or 10 per cent on seed bookings, and just do a better job of monitoring costs.”

It’s a case of smart business minds thinking alike, because without even knowing it, Fowler is heeding the first two of the top expense management tips from the Business Development Bank of Canada: making a plan, and tracking expenses diligently.

Input prices are under pressure everywhere you go in farm country, and supplies can be too. In the West, a poor-quality grain harvest means more canola growers will looking to buy more canola seed this winter. Through what he’s seen at work, Fowler has known since the fall to plan for higher seed costs in 2015.

“In retail, canola seed costs are up so I know that’s going to the farmer.” He has also learned that nine years out of 10, farmers who buy fertilizer in the fall save as much as 20 per cent over those who simply buy in the spring.

Fowler is also bracing himself for higher pesticide costs this coming spring. “We’re in some pretty wet cycle years, we have pretty saturated soils and there’s a pretty high presence of disease now from four years of heavy trash, so our fungicide use will probably be way up next year,” Fowler forecasts. “The only thing I would see going down are machinery purchases and depreciation along with it.”

Already when Country Guide talked to him in the fall, Cedric McLeod of Fredericton, N.B., was looking to forward contract some 2015 corn, and he had been calculating his cost of production.

McLeod, who is also a farm financial adviser, says tracking costs is the first hurdle to overcome when he’s called in, since only 44 per cent of farmers conduct break-even analysis, according to a 2007 Agriculture and AgriFood Canada survey.

“Typically when I get called in, the first challenge is having a good system to track costs,” McLeod says. With 260 acres of his own, a beef herd and a succession opportunity to take over the 800-acre family farm and seed sales business, he knows the value of separating farm activities into distinct enterprises.

“That’s when you start to talk about fixed and variable costs,” McLeod says. The simple online tool he likes best for doing this is the Ontario agriculture ministry’s Publication 60 worksheet. McLeod says it’s the most intuitive and robust method he’s used yet that offers benchmarking, which is another top cost controlling tip.

“There’re two schools of thought on benchmarking,” McLeod says. “The best way to benchmark is to make a goal and benchmark yourself against whether or not you’re able to achieve that goal on an annual basis.” But, McLeod agrees, benchmarking against your own operation alone does carry the risk of falling behind industry averages. He thinks Farm Credit Canada offers the best publicly available benchmarking data to compare to, but he believes peer advisory groups are more effective.

“In a peer group everybody wants everybody to succeed, so I want to challenge you to think a little more strategically, a little more objectively and don’t let yourself off the hook,” McLeod says. “The real power in having a plan and benchmarking yourself is you’re holding yourself accountable to the plan you’ve put together.”

McLeod believes everyone is inclined to low-ball costs, but benchmarking against Publication 60 and peer input ensures your targets are realistic.

For many farmers, upgrading their planning, tracking and benchmarking will make a noticeable difference in controlling costs. But even the professionals can still dig in deeper to manage variable costs and crack down on fixed expenses.

“I took every piece of gear we have on the farm and wrote it in a spreadsheet,” McLeod offers as an example, “its width, typical speed we travel, applied 10 per cent turn time, the fuel use per hour, the labour per hour, the depreciation of the machine, and I know how many acres I can do an hour and what my cost is.” Armed with pinpoint numbers on the operating cost of every piece of iron on the farm, McLeod says he now has a spreadsheet that can generate cost differences between conventional, minimum, and no-till crops, and McLeod says this in turn will be invaluable in helping him determine where his money is best spent on equipment.

John Molenhuis, the producer of Ontario’s Publication 60, says this level of planning comes long after farmers have overcome their first and most difficult, year of tracking costs. Just deciding how to allocate fuel use and labour can be enough of a challenge for most people, he says.

“I’ve had guys say they start with their main crops — corn, soybeans, and wheat — but once they start getting into that, they fan out to more crops or they start refining to a field-by-field basis,” Molenhuis says. “They start seeing the value in doing it and start managing it on a more detailed basis the longer they have it.”

Molenhuis says that although benchmarking is helpful, he has always said the most important column in the worksheet is the one that comes blank. To generate the other values given and updated annually, he relies on a number of resources including the Ontario Farm Input Monitoring Survey conducted by the University of Guelph’s Ridgetown Economics and Business Group. Molenhuis says the last survey conducted in the fall of 2014 showed that fuel prices were relatively similar to the previous fall survey, fertilizer prices were down five per cent on average, and pesticide prices were up by two per cent. Of course regional differences have to be taken into consideration outside of the province. McLeod, for instance, says he usually has to account for increased drying costs and trucking, and Fowler says one of the fastest growing costs in the West is quite possibly general labour.

“We compete with the mining industry, the oil and gas industry, and good general labour is hard to find,” Fowler says. A decade ago, minimum wage plus an extra three dollars at harvest was fairly common. But now farmers are paying $15 to $25 for “a warm body that won’t wreck your $400,000 machine too bad,” Fowler says.

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Amy Petherick

Amy Petherick is a Contributing Editor for Country Guide.

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