Plan to boost business resilience

Business profit comes from well-planned fundamentals and financial discipline

Farm Business
Chris Minehan, farm business consultant with Rural Management Strategies, outlined the essentials for a resilient grain growing business at GRDC's Farm Business Update at Wagga Wagga, NSW, recently. PHOTO Nicole Baxter

Chris Minehan, farm business consultant with Rural Management Strategies, outlined the essentials for a resilient grain growing business at GRDC's Farm Business Update at Wagga Wagga, NSW, recently. PHOTO Nicole Baxter

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Consultant Chris Minehan outlines the essentials for a sustainable farm.

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When it comes to building a profitable and resilient business, management consultant Chris Minehan believes whole farm planning, a systems approach and a low-cost business model enable farm organisations to ride out the tough periods.

Mr Minehan, a director of farm business consultancy Rural Management Strategies in New South Wales, says resilient farms are those that can avoid, mitigate or cope with external shocks and stresses.

"These could include droughts, flood, fire, frost, low commodity prices or the injury or death of one of the farm business's decision-makers," he says.

"Some businesses seem to be able to ride through those external shocks better than others, so it is interesting to explore what sets them apart."

Mr Minehan says a resilient farm business comprises a carefully planned, sustainable and low-cost production system. "It has fertile soil, water when required, a low weed and disease burden, plus diversity."

A fertile soil

Fertile soil has adequate organic carbon levels, effectively cycles nutrients and can break down plant and chemical residues, he says.

In a resilient farming system, subsoil constraints are understood and managed. If the constraints cannot be managed, yield expectations are managed instead.

"It's important to develop and maintain a soil's capacity to mineralise nitrogen, so when it rains in spring, nitrogen is supplied to crops for free," he says.

"Mixed farmers have the capacity to source nitrogen for free through high-quality, well-managed pastures."

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In southern NSW, Mr Minehan says, four years of high-quality, legume-based pasture will provide enough nitrogen for two to three productive crops.

"For those with 60 per cent crop and 40 per cent pasture, nitrogen should be only required in the last third of the rotation. You should not need urea on every crop every year," he says.

"I'm not talking about a clapped-out pasture full of silver grass, barley grass and capeweed; that's not a pasture. I mean a dense, well-nodulated, competitive and well-managed pasture."

Source: Chris Minehan, Rural Management Strategies.

Source: Chris Minehan, Rural Management Strategies.

Planning needed

He adds that productive pastures result from careful management and planning.

"Well-planned and managed pastures become the engine room for driving the profitability of your entire farming system," he says.

"Aside from providing high-quality livestock feed, a productive pasture allows weeds to be controlled and soil nitrogen to be boosted relatively cheaply, so your cropping phase can be low-cost and profitable, without having to put your hand in your pocket every year for expensive grass herbicides or high urea rates."

However, he says, many mixed farmers miss out on these benefits because they do not spend enough time planning.

"Paddocks left in pasture for too long end up sparse, weedy and unproductive, while paddocks cropped for too long have rundown fertility, grass weeds and disease that are costly and unprofitable. Instead, cycle paddocks in and out of pasture by planning over several years, not several months," he says.

"In a crop-only farming system, a pasture can be replaced, to an extent, with pulse and brown manure crops."

Water for crops

Mr Minehan says a resilient farm maintains ground cover and controls summer weeds to preserve available soil water.

"Having water at critical times during the season allows crops to mitigate the effects of frost and heat shock," he says.

"But, for some areas last year, 12 months' rainfall simply wasn't enough to grow a decent crop."

Source: Chris Minehan, Rural Management Strategies.

Source: Chris Minehan, Rural Management Strategies.

If predictions are accurate, he says, more dry seasons are likely going forward.

"As such, those in marginal areas need to consider incorporating long fallows or brown manure crops to use two years' rainfall to grow one profitable crop instead of two unprofitable crops."

Low pest pressure

There is nothing new in saying a resilient system is one with low levels of weeds and disease, but this can be approached in different ways, Mr Minehan says.

"Effective planning and attention to detail allows weeds and diseases to be kept low for a relatively low cost, using crop rotation, narrow row spacing and crop competition."

Source: Chris Minehan, Rural Management Strategies.

Source: Chris Minehan, Rural Management Strategies.

Without planning, he says, businesses become locked into a high-cost system reliant on expensive herbicides and fungicides to manage problems that can be dealt with by the system.

Diverse income

In nature, he says, the most resilient systems are the most diverse; and the same is true in farm businesses.

"In farming, a diverse business has different income streams, crop types and livestock," he says.

"There is also a need to maintain biodiversity to ensure beneficial insects are healthy so they can control pest species."

When it comes to insecticides, Mr Minehan believes there are some growers who spray at the start and finish of every season, and some nearby who never, or rarely, spray.

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"I suspect some people are taking out all of the beneficials at the start of the season so there's none to mop up the pests when they arrive, which forces them to spray again," he says.

"The challenge with diversity, and preserving biodiversity, is that it also brings complexity and the need for compromise, plus a degree of inefficiency."

A complex mixed farm with enterprise diversity has more cogs turning and requires more sophisticated management and planning, Mr Minehan says, however those with simple systems need to consider the risks associated with a lack of diversity.

Source: Chris Minehan, Rural Management Strategies.

Source: Chris Minehan, Rural Management Strategies.

For instance, he says, consider a cropping-only enterprise where three or four different crop types all flower in the same six-to-eight-week window.

"If you have been whacked by frost in three of the past four years, and that frost window is predicted to not only become wider but more intense, it might be time to think about how you can introduce some diversity into your system to lessen the impact of that risk," he says.

"At the moment all your eggs are in one basket, and that basket has a hole in it."

Time to act

Mr Minehan says many growers are starting to think outside the square.

He points to the commercialisation of super-high oleic safflower, developed by CSIRO through a GRDC joint venture called the 'Crop Biofactories Initiative', as an example of a new crop and industry with the potential to inject agronomic and income diversity.

Source: Chris Minehan, Rural Management Strategies.

Source: Chris Minehan, Rural Management Strategies.

The oil profile of safflower is unique and of high quality, allowing it to be used as a plant-based alternative to fossil fuel oils in industrial lubricants, pharmaceuticals and bioplastics.

"Importantly, it flowers in a different window to traditional winter crops, enabling it to be planted at the end of May for November to December flowering," he says.

"The plant is naturally heat tolerant, so is not affected by flowering outside the period of highest frost risk."

Another strategy

Another strategy that ticks the boxes of soil fertility, plant available water, weed and disease control, plus diversity is a brown manure crop.

"This involves sowing a legume or pulse crop early to maximise biomass production, out-compete weeds and fix large amounts of nitrogen," Mr Minehan says.

"It is then terminated in September before weeds set seed, so complete weed control is achieved, nitrogen is left in the paddock and plenty of ground cover is left over summer to capture any available rainfall."

Source: Chris Minehan, Rural Management Strategies.

Source: Chris Minehan, Rural Management Strategies.

The next step, he says, is to sow a second break crop such as canola to take advantage of the nitrogen, soil water and mop up any remaining weeds, instead of expecting the one break crop to deal with a huge weed burden, which puts further pressure on selective herbicides such as Clethodim. This is known as a double break.

"While some people think a brown manure is just for those who are not reliant on the income from those paddocks, it is actually not the case," he says.

"Often, back-of-the-envelope gross margin calculations overestimate the income, underestimate the costs and do not account for the flow-on cost savings achievable from growing one brown manured crop."

Select poor paddocks

Also, when considering a brown manure crop, he says it is worth calculating the benefits of the tactic based on figures from the farm's worst-performing paddock, not average farm yields.

"Think about how it would make you feel if you could turn that paddock into one of your best-performing paddocks," he says.

"In 2016 one of our clients had a block where all but two paddocks were sown to barley. We decided the two worst paddocks, the ones with the most weeds, the lowest fertility and the lowest profitability, were to be planted to field peas and then brown manured."

Source: Chris Minehan, Rural Management Strategies.

Source: Chris Minehan, Rural Management Strategies.

A key consideration, he says, was the long-term impacts of the crop rotation. The aim was to reduce the business's cost structure, reduce risk and the reliance on expensive herbicides, fungicides and fertiliser to increase profit.

"In 2017, the average yield of canola planted into paddocks where barley had been sown in 2016 was 0.8 tonnes per hectare," he says.

"By contrast, the average canola yield planted into paddocks that had been sown to field peas and brown manured was 1.9t/ha, which paid for the cost of brown manuring in just one year."

In 2018, the yields were similar, however the costs were lower on the brown-manured paddocks because there were no grass weeds.

In 2019, he says, deep-soil nitrogen tests from the 2016 barley paddocks had just 50 kilograms/ha of available nitrogen at a depth of 60 centimetres.

"By contrast, the average available nitrogen on the brown-manured paddocks at 60cm was 100kg/ha and the grower has not had to apply urea to either paddock brown-manured during 2016," he says.

"Although this may not happen every time, it shows what is possible using a brown manure crop."

Mr Minehan says analysing the profitability of brown manuring using simple gross margins over one season will never show the long-term benefits.

"You need to analyse brown manure crops over the whole farm and across a number of years," he says.

"We have enough clients who have been doing this for long enough to give us confidence that this approach works well, when planned and executed properly."

The lifeblood

Cash flow, Mr Minehan says, is the lifeblood of all businesses.

"Every manager needs to know where cash is coming from and going to, particularly when businesses are coming out of tough periods with low income," he says.

"Bank managers are supportive during dry periods, but they do not like surprises, so if more money is needed in October, have those conversations in February or March."

Cost structure is a critical part of developing a resilient business, he says, and is influenced by scale, production system and financial discipline.

"Scale plays a major role in diluting overhead costs across a larger productive area; however, scale is not a magic wand," he says.

"Without a sustainable, productive and low-cost production system, plus suitable business processes, increasing scale simply takes a small unprofitable business and turns it into a big unprofitable business."

Useful ratios

Mr Minehan uses earnings before interest and tax, known as the 'EBIT margin', among others, to analyse farm business performance.

EBIT is a measure of profitability used across various businesses inside and outside agriculture and an EBIT margin is calculated as EBIT divided by sales.

The ratio reflects the business's risk profile, with a higher margin representing lower costs relative to income. For example, he says, a business with an income of $1 million and operating costs of $700,000, has an EBIT of $300,000 and an EBIT margin of 30 per cent.

Businesses with a higher margin have a larger buffer to protect themselves against difficult circumstances when things go wrong, he says.

EBIT is one of a range of profit measures. It is important to remember that production costs can be affected by asset ownership, for example, such as contracting versus owning machinery. Business owners will need to select the most appropriate profit measure which correspond to their long term objectives.

Mr Minehan says he does not subscribe to the idea that all money is made in one or two good years so you have to aim high every year to avoid missing out.

"This approach just locks you into a high-cost structure, so when seasonal conditions are tough there's a higher bar you have to reach before you break even. Opportunity cost is good economic theory, but actual losses are what put businesses in jeopardy," he says.

"In the good years, businesses with higher margins and lower costs are generally just as productive, but they are capturing and keeping more income as profit."

Resilient families

Lastly, but most importantly, he says, resilient businesses are run by people who have a plan and know where they are going.

"I'm no wellness blogger, but I know that it is important to give yourself permission to look after yourself. Nourishing food, exercise, sleep and relaxation are critical for physical and mental health," he says.

"If we work ourselves into the ground, we cannot make good decisions. Plan well in advance, so you're not making big decisions in heat of battle."

SEE ALSO: Transitioning a viable farm to the next generation

He says planning involves setting a long-term vision, not only for the business, but also for where you as an individual and as a family want to be in two, five, 10 and 20 years time.

"Create a management team of experts and advisers who understand your business and who are willing to work as part of a team of people committed to helping you achieve your goals," he says.

"Holidays are important and should not be put off because finances are tight. Everyone needs time away from their business to relax, recharge and regain perspective."

Even if you are going to the bank for $500,000 of extra working capital, he says, consider that an additional $5000 to take the kids camping for a week will not be what causes the bank to reject your request.

"Resilience comes from a loving family, a sense of purpose and connection with your community," he says.

"Careful planning, with trusted advisers, frees up time by cutting through the decision paralysis that consumes so much time and energy."

Indeed, he says, planning helps you sleep at night, achieve your goals and gives you more time to spend with the ones you love, doing the things you enjoy.

GRDC Research Code ORM00015

More information: Chris Minehan, 0427 213 660, chris@rmsag.com.au

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