After some of my recent articles (see links at the right hand column of your screen) talking about what is happening around the world in primary agricultural production — which countries are leading the way and who we in Western Canada are going to have to compete against in the world markets — I have had comments from some of you saying that I’ve left you with feelings of despair and hopelessness.
Before you all decide to sell your farms, as some of you have said you might, let’s look at what you might do to become more profitable.
In Canada we grow more grains that we can consume so we are destined to have to sell the excess into world markets, with the hope that those markets will pay enough to make our farms profitable year after year. We are not the only country in this situation; we have many competitors. Some of these competitors are expanding their production capabilities rapidly as they bring dormant lands back into production. This is making it very difficult to remain profitable.
The world price of grains is determined by supply and demand. You can’t control that. So let’s look at what you can control that could help your farm become more competitive in world markets and more profitable at home.
Farming is big business. You’re competing against major world competitors in a market beset by political interference, trade deals, tariffs and duties and multinational companies. Are any of the other players concerned about whether or not you are profitable? Probably not.
Where to start
I would start with attention to detail. The first thing I would suggest is getting a better understanding of your farm’s financial details.
I’ve sat in on numerous seminars about farm financials and the one key thing I’ve heard is that using accrual financial statements is the only way to get a true look at your financial picture. Year-over-year comparisons can show you how your operation has changed financially over time. This will help you see your true costs and cash flow, which will help you make better decisions.
If you’re not using accrual financial statements you may want to consider talking to your accountant about converting your farm to accrual. If you are already using accrual financial statements, sit down and do some year-over-year comparisons to see how your farm is doing. At these seminars, experts suggested doing financial reviews quarterly or at least twice-annually.
Studies and articles show that the cost of inputs on a grain farm have doubled over the last 10 years as have the fixed costs such as machinery, land, labour and buildings. We know grain prices haven’t doubled over the past 10 years to offset these increases, so the only way to increase profitability is to increase production, increase selling prices and reduce costs.
The Five Per Cent Rule can have a major impact on profitability. Improving your yield by five per cent, increasing your selling price by five per cent and reducing your fixed costs by five per cent can increase your net profit from 30 to over 100 per cent, depending on your financial situation. (You can listen to Kristjan Hebert talk about his Five Per Cent Rule by finding the commercial banking section of the Royal Bank’s website, and then searching for “Kristjan Hebert.”)
Another way to improve profitability is to fine specialty markets that will pay a better return. That could be a market next door, in another province or ub another country. The crops you grow and the markets you sell to are only restricted by your ability to adapt.
The expansion of Canadian grain processing facilities is positive, and should bring better returns. We have seen a large growth in Prairie canola crushing capacity and recently there have been announcements of new pea crushing and extraction facilities in all three Prairie provinces. With processors adding value on the Prairies rather than shipping commodities to the coast for export, prices back to producers at the processor should be better than prices at the elevator. These facilities add competitive options, helps to improve market prices.
It’s all about how to get a better net dollar back to your farm’s bottom line.
In my next article I will talk about marketing strategies that could help you beat the Five Per Cent Rule.