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AGRICULTURE: How Input Cost Management in Farming Determines Profit

 





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PROFITABILITY in grain and animal farming is largely driven by input cost management, the lower the total of input costs the greater the profits yielded.

Paul Makube, Senior Agricultural Economist at FNB answers a few questions on the biggest expenses in animal and grain farming; he proposes some cost cutting measures for farmers in these sectors.

What are the biggest expenses in animal and grain farming?

Fertiliser accounts for roughly 22% of the direct variable costs, followed by fuel at +15%, herbicide and pesticides at +11% and seed at +10%. These of course will differ according to the commodity being produced, expected yield and whether it is in dry or irrigated land.

In livestock production, the greatest expenditure is in feed and health costs. Feed constitutes 50% to 55% of input costs. Maize constitutes +70% of livestock feed. The profitability of this sector is highly linked to grain production.

What can farmers do better to decrease the expenditure?

Grain farmers have to adopt a sustainable purchasing strategy for fertiliser and herbicides, together these account for over 30% of production costs. About 80% of fertilizer and some herbicides and pesticides are imported and therefore subject to fluctuations in the rand/ US dollar exchange rate and international prices. If one adds fuel to the mix, it therefore means that the farmer has no influence on prices of closer to 49% of production inputs.

A prudent application of fertiliser/ herbicide/ pesticides is required – application at the right time, in the correct type and quantities. It also means regular soil tests, practising conservation agriculture and adoption of genetically modified (GM) crops that in turn help lower the reliance on pesticides and herbicides.

Livestock requires an improvement in feed conversion ratios and a smart grain procurement policy which takes into account the high price volatility.

How does prudent farming impact on efficiency in farming?

Last year saw the worst drought since the 1900s. Grain prices skyrocketed and squeezed margins in the poultry, pork and feedlot industries. We also had an invasion of the Fall Army Worm. What helped is that almost 80% of South Africa’s crops are GMs, minimising impact on the 2016/17 crop which saw the recent grain and oilseed production estimate coming in at a record high of 18.10 million tons, up 93% year-on-year (y/y). The maize crop estimate rebounded strongly by 101% y/y to 15.63 million tons, according to the June 2017 Crop Estimate Committee (CEC) report.

What rule of thumb should be kept to ensure that a farming business is sustainable even in tough times?

Ensure that a sound business and financial plan is developed, implemented and augmented from time to time to address the immediate and new risks.

“Like any business, profitability is increased by managing spend better. A noble idea would be to sit with a financial planner who can assist with a range of financial products to address individual and business needs” concludes Makube.


 
 
 
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