Let's Get Profitable22 Feb '18
| As we embark on 2018 the agricultural sector continues to evolve to a more ‘corporatised’ model, more competitive for the share of the mighty dollar than ever. I watch on with interest as producers adapt to meet the new pressures of business in today’s modern world. Farming is transforming from the romantic pursuit we all love to a modern, 24 hour a day, highly sophisticated operation. As we go about our daily business commodities are traded in all corners of the world influencing your business. Some producers struggle with this transition, others embrace it but without doubt there are still great opportunities for astute producers to prosper.|
|In my career I have worked with many livestock producers throughout Australia and visited ranches in many parts of the world. Despite the variation in location, climate, culture there are many similarities between all producer, not least, we all produce and sell livestock. However, in all parts of the world there are producers who excel above their peers. These producers commonly do the following;|
Strive to be a Price Maker not a Price TakerWe have probably all heard of this phrase and thought that it is a nice concept. It is! A world where we could set our own prices and the market would readily accept these is a dream, however unlikely. This concept will only occur, if the fundamentals of supply & demand have not yet rationalised. In the pursuit of becoming a Price Maker you must firstly produce a product that is in demand then work tirelessly to increase this demand.
To start this journey, we must first consider exactly what it is that we produce and what is the real market demand for that product. If demand is trending higher, you should be optimistic for upward pressure on prices and vice versa. What drives demand for your product and how can you affect this? Below are a sample of fundamental demand drivers for your livestock;
- Weather – We are all subject to the uncontrollable weather, but can we better manage this? Consider what your fellow producers doing? Are they increasing or decreasing their stock numbers? Buying when many others are will cost you more, selling when others are will raise you less, how can you use the opportunity created by weather to buy low, sell high?
- Business Cycle – Are you in the same continual business cycle as your fellow producers? Do you sell your product at the same time as fellow producers? By doing so you may be adding to a period where larger supply is outweighing demand, this will result in downward pressure on prices. In today’s information age it is easy to research how sale prices correlate with supply volume at times of the year and consider how you can escape this cycle;
- Market Depth – Do you understand who is providing the current price support to the market and how profitable they are at that level? What economic factors are the buyers of your livestock subject to and does your product help or hinder this situation? It is vital to always understand the economic position of the supply chain through to consumers. Where is the end market for your product and what is happening there? Understanding this will allow you to better predict market trends and recognise the trend of the market – no link in the supply chain can sustain losses long term;
- Profit Opportunity – Does your product provide opportunities for the upstream supply chain to make higher profits? What is your value proposition to your buyers? An efficient animal will lower production costs, a higher quality carcass will generate greater sales revenue, a larger carcass will reduce production overheads etc. Understand your value proposition and market these qualities, if your stock can make someone more profit let them know and back up your claims with data;
Ask the tough questions!Simply, are you getting the best deal available? By nature, most of us pay close attention to sale prices however far fewer pay the same degree of attention to our costs. How many seedstock producers have you seen advertise their cost of production – nil! The old saying ‘a dollar saved is a dollar earned’ remains as true as ever and in practice it is easier to save on expenditure then increase revenue. Taking the time to periodically check prices and charges may result in your business significantly reducing costs and creating more profit for you.
Each business will have different costs and it is a good exercise to set a goal of analysing 3-5 of these per year. Initially focus your attention on the big costs as these will provide the greatest immediate opportunity for savings. Some examples may be bank interest, farm supplies, telecommunications and advisor fees.
Your custom is vitally important to the success of each of your suppliers, yet I would anticipate not many of us have asked our bank to lower our interest rate, regularly checked the prices of our ag supplier or asked our accountant for a quote.
Understand the banking equationGenerally, few producers understand that interest rates are largely subjective. The interest rate you are paying is formulated by; the banks cost of funds (objective) + margin (subjective). Margin contains two elements. Firstly, an amount required to make the bank in business; cover overheads and provide a return to shareholders and secondly, a ‘risk margin’ based on the banks assessment of you and your business. You can ask your banker for the dissection of your interest rate. Objectively consider how ‘risky’ your business is to the bank. Do you have a strong equity position? Are you profitable? Are you repaying your debt? Are your facilities secured against land? You may come to the conclusion that your business is lower ‘risk’ than your interest rate suggests. Ask to have a discussion with your banker. Even if you are unsure of where you sit talk to your banker, ask them to explain the rate and develop a plan to lower your interest rate.
If you can achieve a saving of 0.5-1% on your borrowings this seemingly small amounts can result in you paying down debt quicker, building equity and ultimately wealth.
Profitable at any scaleMost of us share a desire to grow our businesses, achieve financial freedom and god willing create more opportunity for future generations. For most of us the only way we can achieve this is to generate profits and reinvest these back into our business. The most important word is ‘profits’ despite the current scale of your business activity it can only grow if you continue to invest into the business – you are never too small to make a profit.
In SummaryWhilst the above is not exhaustive I hope it provokes thought on how you can achieve success in your business both now and in the future.
|Contributed by Geoff Birchnell |