Farm profitability analysis can help producers make decisions
that will either earn more money or the same money with less work.
Ultimately, there's no point in doing the analysis if it
doesn't influence and change business behaviour.
Carefully select the crops you wish to grow. Don't seed 300
acres of oats out of habit, believing you know intuitively what
your gross margin will be. While planning next year's crop, put
the plan on paper and force yourself to apply the most reasonable
estimates of yields and prices. Budget for the right crop nutrients
and protection package to maximize gross margin.
I would say the right inputs will maximize yield 95 percent of
the time in Western Canada. There are no guarantees, but it's
more profitable to hit 80 percent of a high budget than 80 percent
of an average budget.
This seems obvious, but choose the most profitable crops to grow
within the restrictions set out by crop rotation and chemical
residuals. It's not always predictable which of your top four
gross margin crops will be the winner from one year to the next.
However, it's possible to identify your top four crops and
those which have, historically, been your bottom three.
Durum versus spring wheat is a perfect example in parts of
southern Saskatchewan. Durum outperforms hard red spring both in
yield and price nine out of 10 years, so durum would be the logical
It's important to focus on factors within our control. We
monitor factors that affect gross margin such as rainfall,
temperature, and commodity prices, but these aren't where we
focus our time and effort.
The same can be said about land considerations. Over the long
term, we may strategically focus on renting / purchasing higher
quality land, but over the short term it is hard to manage land
costs to increase profits.
We should direct most of our attention to ensuring that we have
enough labour and machinery and the quality management that is
needed for these resources. Ineffective management of our labour
and machinery during seeding, growing and harvesting will stack the
cards against us.
Remember that the last five to 15 percent of the crop holds all
the profit. We say good-bye to some or all of our profit if we take
on more acres than we can manage. As well, too many crops makes it
difficult to execute production activities efficiently. This
isn't to say that managing a higher number of crops cannot be
done. There's simply a lower probability of success. Limiting
the number of crops reduces the number of equipment changes that
waste time at critical points of production.
Labour, power, and machinery (LPM) is a difficult category to
manage.The big improvement in machinery technology provides
limitless options. Technology improvements can saves time and
increase yield and capacity. However, how much more money do we
make using our brand new air drill when compared to our
four-year-old one? These nuances add another layer of complexity.
The added value of increased capacity and / or technological
improvements, such as consistent seed depth, varies from year to
year, but will the profitability improvement outweigh the
LPM shouldn't be micro-managed. Instead, it should be
assessed with a five-year capital budget in mind while considering
The LPM benchmark numbers of your target group of peers.
Don't compare to the industry average. Our goal is to strive
for the best, and currently our top group of producers are
targeting LPM of around $100 per acre.
A simple rule is less is better. LPM is highly correlated with
the amount and price of machinery. Two large combines cost less
than three slightly less expensive combines with a similar total
capacity. Trading our four-wheel drive tractors every seven years
rather than every four costs less.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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