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Updated 23 Apr 2018

Farming successfully in volatile times comes down to knowing your costs

Primary producers need to put their inherent adaptability on paper, or they might have to face a grim reality – one where their farm simply isn’t profitable anymore.

06 July 2017  Share  0 comments  Print

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Farmers are among the very few providers of goods whose way of life is intrinsically agile. According to Standard Bank Senior Manager: Agribusiness, MC Loock, this gives farmers a clear advantage in managing the increasing volatility in their industry. 

“Farmers are used to adjusting their operations on a daily basis in order to manage variations in short-term weather events and longer-term climate patterns. They’ve always operated in an environment in which markets and prices shift continuously, often without warning. And they’re accustomed to constantly reworking their finances, whether for inputs, equipment, or capital expenses” Loock says.

“Their adaptability is borne out by the Department of Agriculture, Fisheries, and Forestry’s (DAFF) Economic Review for 2015/16.” 

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The DAFF’s review states that gross farming income from all agricultural products increased by 4.9% on the previous year. In spite of severe drought conditions and production volumes dropping, net farming income increased slightly by 1.8%.

Although inputs such as fuel and fertiliser became costlier, overall the prices paid by farmers for farming requisites remained unchanged at 4.8%. At the same time, prices received by farmers for agricultural products increased on average by 14,3%. This resulted in an increase of 8,8% in the terms of trade. The value of capital assets in agriculture increased by 9,6%.

“Although many factors contribute to these positive outcomes, one of the most fundamental is the resilience of farmers,” Loock says. “We believe, however, that they can – and should – formalise that resilience, thereby automatically embedding sustainability into their operations. Prosperity should not be dependent on the staying power of an individual. It is possible to take a lot of the uncertainty out of the future.” 

Effective management of volatility starts with planning

Farm -planning

“The basis of good planning is understanding your costs,” says Loock. “If you know how much you must spend to get your product to market, then you automatically know what price you cannot afford to accept. In turn, this tells you whether or not to plant.

“In the case of a livestock operation, for instance, if you know that the price of your major feedstock, maize, is going up and that the price of beef is dropping, you can make sensible decisions about continuing with your cattle or switching to a different business. 

“In any case, in an ideal world you would probably be farming with both cattle and maize, to save on your feedstock costs, take advantage of the different cost and profitability cycles of both products, and be able to absorb price shocks across a longer value chain.”

For many farmers, price discovery for inputs takes place at least nine months ahead of the sale of a product, apparently making budgeting for profitability difficult. 

“In fact, it actually assists with planning because it enables you to both fix costs upfront and reduce them,” Loock adds. “Buying your inputs at the end rather than at the beginning of a season gives you the lowest possible prices and a very precise idea of the lowest price you can accept for your product should the coming season be difficult.” 

He recommends shopping around for the best end of season prices: “Don’t simply buy from your usual supplier without comparing prices. The more competition you create among suppliers, the more likely you are to get bargains.”

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If you have a plan on paper

Once farmers have fixed as many of their costs as possible – as early as possible, they should set about fixing their own income via contracts and then use hedging to cover any outstanding variables. 

“Contracts give you the comfort of knowing before you plant that your prices will exceed your costs and that there will be profit,” Loock says. “It also makes it easier to get production finance. It’s important, however, to reserve some of your product for selling at the end of the season, when stocks are drying up and buyers will pay premium prices. This will consolidate your profitability.” 

There are some input costs, like fuel, and other factors such as the exchange rate that cannot be fixed or even predicted too far in advance. Weather patterns, too, are becoming increasingly unpredictable and extreme.

“It’s still possible to manage this kind of uncertainty positively,” Loock adds. “In your planning phase, create a wide range of different scenarios that include all possible variables that could impact your business. Build in trigger or price levels at which you will need to reconsider your production plan in time to mitigate negative results. This process will also give you insight into ways in which you should be diversifying your business so that, in any given circumstance, you have the means to be sustainable.

A recent but profoundly effective means of reducing the effects of volatility at farm level is the use of renewable energy and eco-intensive agriculture. “Taking control of your own energy supply reduces cost while increasing your independence of external organisations,” Loock says. “Also, using natural inputs sourced from your own farm or your community slashes costs, improves your control over your operations, massively boosts your product’s credibility with an increasingly environmentally aware consumer base, and positions you to fulfill your innate role as an environmental custodian.”

As statistics indicate, farming is still a generally profitable business to be in. By doing some planning and being prepared to innovate, you can ensure that, in your particular case, it remains so.

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