A friend of mine grew up on a farm. After a career in the corporate world he is thinking of returning to the land by buying a property and running some cattle. Being very aware of the necessity for commercial viability he asked what I thought made a profitable farmer.
There is much irony in this question. I was not brought up on a farm, nor do I have any farming experience. I even fail at growing veggies in the garden as the possums eat any green things the wallabies leave behind.
But I do think about farming a lot. Not about the skills in fixing the tractor or knowing when to plough but with a bias for the big picture that determines a doubling of production from a dwindling stock of viable farmland.
Answering the question of how to be profitable, here are the first six things that came into my head…
- You really have to know what you are doing as the Pareto principle applies — 20% of farms deliver 80% of production
- Choose your property wisely — it needs to be either productive or restorable
- Decide if you will broker your own deals with retailers or go with aggregators
- Don’t always listen to your neighbours because what great-granddad did might not work today [arguably it didn’t back then] but at the same time you will need their help
- Climate change effects will be real but manageable given that the Australian climate is already makes agriculture a challenge
- Diversify, diversify, diversify
In other words, farming is a business just like any other. You need to know how to do it well to be profitable and that means efficiently matching skills to the available resources.
And it takes guts to farm. Thankfully there are many brave souls with such courage, otherwise most of us would starve or work in vain to feed the possums.
Post comments to suggest things to add [or remove] from the list.
We have found when studying our clients from all over the world, in different economies, that no matter the system all farmers only make 5% profit. Check it out yourself. We found the reason for this and have solved it through a process call holistic management financial planning. Our clients, independent research found were in the region of 300% more profitable than their neighbours. Your 6 suggestions fit well into the holistic financial planning process and are valid. Advise your friend to seek training in holistic management first. Online, at TAFE or with a consultant.
Mark..I think the trail of responses to your question will be very interesting. I have worked in rural development and farming systems in Australia (including systems relating to the beneficial use of treated coal seam water in Qld) and 19 developing countries overseas. Profitability means different things to farming families in different cultures.
In the Australian context I think Rodger’s opening statement on holistic management is spot on… however with Australian family farms getting structure, succession planning and relationships management right before business or financial planning is critical.
Regarding some of your points:
Pareto principle — 20% of farms deliver 80% of production..yes..but increasing scale does not confer increasing gross margin / profitability / ROI..to me in any farming community understanding what the top 10-20% are achieving in terms of sustainable productivity, marketing, control of total costs of production is what important in the profitability pursuit. ie why are top end full-time farmers achieving 5-6% ROI where average farmers in the same types of cropping / livestock or mixed farming systems are achieving 1-2%.
Wise property choice/getting good technical advice to support decisions/negotiating the deal — be really clear on personal / family objectives for investing, use the right consultants and key successful farming people from the local/regional area for advice – potential neighbours are not necessarily the best advisers. Bring one or more of your trusted advisers to negotiations with the seller or the seller+ agent.
Managing risk – Climate change reflected in increased variability and shifts of mean/median weather conditions is one of many risks a forward thinking farm family needs to incorporate into its business plan. Understanding how leading edge farmers in your preferred locality/region for investment have changed their permanent pasture, annual forage, grain or other agricultural or horticultural crop variety or livestock breed mix etc to add resilience in coping profitably with changing climate – i.e. rainfall patterns, max and min temperatures, heat waves, frequency of floods, droughts and fires etc is important.
Diversify, diversify, diversify – this needs clarification and caution..the most profitable and resilient dairy farmers I know in Australia only produce milk..they may well have off-farm investment..they may well contract out silage production to local farmers within an economic radius of their business. The most successful large scale beef producers I know are focused on beef and may produce grain and forage crops to support their beef marketing and take a whole of supply chain approach to this one primary beef marketing business but diversify their localities of operation, largely to minimise their exposure to normal variability in weather conditions and often to longer-term climate change.
The highest income rural smallholder families I know in Papua New Guinea, Solomon Islands or Vanuatu who are commercial in motivation (as opposed to semi-commercial or subsistence families) might have pigs and or cattle, 3-4 major vegetable or fruit crops and possibly fishing if coastal dwellers..for many of these people food security, educating children and fulfilling complex social obligations will be their primary drivers in farming, not profitability per se.