Farm managers deal with a range of production variables specific to each farm.
These influence the farming system that best suits the business and include:
- soil moisture holding capacity
- Soil fertility
- Problem weeds and pests
- Herbicide resistance
- Climatic factors, such as frost or heat.
Profits are made by managing these variables to achieve the best outcome over the seasons.
The selection and frequency of reoccurrence for each enterprise within the land use rotation is defined as the farming system. Enterprise refers to crop or livestock, including the type of crop or livestock.
The most profitable land use rotation for each business will be influenced by well-known factors, such as:
- The mix of enterprises
- Crop variety mix
- Crop nutrition
- Disease, weed and pest control
Adopting the best farming system for each business is a key to annual profit.
A rotation with less income volatility and lower costs will result in stronger average profits across variable seasons.
Focus on income volatility
A recent review of financial performance of ORM clients examined over the six years to the 2017 season indicates that while the most profitable farming system varies between regions, a common driver of strong profits is a farming system that best manages the impact of fluctuating seasons on income and costs.
Each farming system has a different break-even income, which is a measure of the total cost per hectare for that business.
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Break-even is the income required to cover all business costs including family living and debt servicing.
When comparing farming systems generating similar profit, analysis showed that farming systems with lower costs per hectare achieved profits in more years than systems with higher costs per hectare, even when total income generated was lower.
For many farm managers, a farming system that forecasts less income on paper is not perceived as a more profitable one, so it can be a difficult decision to reduce crop intensity or enterprise mix.
However, due to the significant increase in costs associated with modern farming the upside of this in favourable seasons is often not enough to offset larger losses that occur in difficult seasons.
The balance between achieving profits in most years verses larger profits in some years becomes the driver of overall profitability.
Cropped paddocks with low fertility or a weed burden usually require extra inputs, resulting in higher costs per hectare. If rainfall is also limiting, a higher yield per hectare is required to break even in these paddocks.
Most broadacre grain growers experience large fluctuations in rainfall and climate between seasons, with the result that high cost paddocks are subject to losses in more years.
A six-year rotation with a lower cost structure can improve overall profitability through consistent profits achieved in more years.
Some businesses may accept high-cost paddock/s as being part of an overall rotation objective or sequence of enterprises and this can be quite justified. But the potential downside is that a high-cost paddock becomes the weakest link in the chain and drags profit down on what otherwise could be achieved.
Less can be best
As profit is impacted by high costs and volatile income, a farming system that achieves the same profit with lower costs and less income fluctuation will achieve the strongest longer-term average profitability.
It is feasible that a rotation with lower crop intensity can achieve similar profits with lower financial risk.
This can be illustrated as follows:
- Reduce crop intensity to 75 to 80 per cent by dropping the highest cost paddock/s or those with high income variability.
- Utilise the 20 to 25pc non-cropped area to cost-effectively rectify problems weeds or low fertility so these areas become low cost when returned to cropping.
- Use non-cropped paddocks to store soil moisture, reduce weed pressure and treat soil-borne disease levels to reduce overall income volatility.
- Costs per cropped hectare will reduce as will total dollars spent.
- Livestock can be introduced to utilise non-cropped areas.
- The livestock income will cover costs on the non-cropped area and can make strong contributions to profits.
- If the reduction in crop intensity causes a surplus of on-farm machinery and labour, then income from contracting can be considered.
- Cropped hectares can reduce a managers stress, improve timeliness and potentially enhance lifestyle.
Gross margins a tool for assessing enterprises' marginal returns
Gross margins provide an estimate of income and variable costs per hectare and are a tool to assess the relative marginal return of individual enterprises.
When fixed costs are added to a land use rotation, a whole-farm margin comparison can be analysed.
Table 1 and Table 2 provide comparisons of two typical rotations in the medium-rainfall zone.
The tables illustrate that a less intensive rotation can be as profitable and carry less financial risk.
Profit for each crop type varies according to their position in the rotation.
For example, wheat on fallow has higher yield potential due to stored soil moisture.
However, this fallow-sheep-sheep rotation has a lower cost. This is due to the lower weed pressure being offset by extra nitrogen fertiliser requirements to support the higher yield.
The same six-year average profit is achieved for each of the above rotations.
However, the lower crop intensive rotation spends an average $69 per hectare less.
When using the lower intensity rotation, a 3000-hectare farm would spend about $200,000 less per year.
Yet a lower intensity rotation can still achieve the same profit with less financial risk. The lower total annual dollar spend, combined with less income volatility between seasons, results in a more resilient farming system. This is one that is making profits in more years.