Agri-Insight
The previous article explored the issue of shifting food preferences among the world's various population demographics and how the development is reshaping the agricultural production landscape, as farmers strive to remain relevant in the ever-changing business terrain.
Today, I will be looking at a topic some farmers may find contentious because they are guilty of some of the issues that I will speak against if they are not seriously taking agriculture as a business.
Of course, that will deter me from calling a spade a spade because someone needs to tell them to their faces that they must act professionally if their dream of becoming serious businesspeople is to metamorphose into a reality.
Here I am talking of the issue of costs incurred during the production process and how they impact on profitability if not handled properly.
The most important costs are fixed or overhead and input or production costs, which farmers have no choice but deal with them each time they want to produce a crop.
There are many other classes of costs but I will concentrate on fixed and input costs and how they can impact on the farmer's business aspirations, hence the need to manage them professionally.
If the farmer cannot manage them, then he has to swallow his pride and seek guidance from experts in the field.
The size of one's farm does not matter for this one because if the intention is to produce something and make money, then there is need to properly manage everything that happens on the farm for which costs have always emerged the biggest contender for such attention.
If the farmer allows costs to escalate without corresponding production levels that can help offset them, then the farmer inevitably drifts into losses that can hound him out of business. Any cost that is incurred without justification has the potential to influence the profit graph and impact on the viability of any business project.
It will not take rocket science to realise that two categories of costs have always stood out like a sore thumb when it comes to identifying the biggest causes why farmers end up incurring heavy losses in farming.
Generally, fixed costs are outlays incurred when running a business but need to be paid even in times of hardship or when nothing was produced. They are fixed and have to be dealt with no matter what.
It is, however, very difficult to apportion a true fixed cost to a specific farming enterprise, as there are always many factors that influence the ultimate figures incurred.
Such things as loan repayments, insurance on buildings and vehicles and machinery, accounting fees, bank charges, training costs and depreciation come to the fore when the subjects of fixed costs comes up.
Naturally, fixed costs are greater with crop production than with livestock farming, thanks to the high value of the machinery and implements, to name a few, needed for crop production.
The fixed cost for a tractor valued at US$30 000, for instance, could be as much as US$3 000 per month. On the one hand, the fixed costs involved could be depreciation, insurance, license fees, and storage fees (cost of a shed) of the tractor.
Given such a scenario, the only way to affect profits positively is through reducing the fixed costs.
They have to be managed although the stark reality on the ground is that they still have to be paid even if there are no rains during that season leading to total crop failure.
The farmer has to manage and keep them as low as possible.
One sure way through which the farmer can maintain the costs at manageable levels is by living within his means and avoid assuming a very high standard of life that cannot be sustained by the profits he makes from the farm.
In most cases, farmers who try to be what they are not end up chewing into money meant to finance operations and this may leave them unable to fulfil their obligations as businesspeople.
It is also possible that some farmers can easily find themselves in some kind of undeclared competition with neighbours and always try to match the neighbour pound for pound and in so doing stress their pockets to the point of failing to finance the next farming operation.
This had happened with some tobacco farmers that I know. They could not brook the idea of the neighbour building a house and buying household furniture after selling his crop and quickly did the same thing, only to exhaust all earnings and subsequently failed to finance a new season.
One other important observation is that farmers must always strive to manage their living costs strictly according to a budget and avoid impulse buying.
Those intending to take out loans also need to first consider their cash flows properly and the reasons taking up the loan. They also need to limit the number of loans they take up. Some farmers naturally feel that negotiating for lower interest rates is a sign of less financial muscle, which is in fact, a sign of a weak personality. It does not hurt to acknowledge one's capabilities or shortcomings.
In recent times we have witnessed farmers and creditors engaged in gruelling legal battles that have often left farmers licking bruised egos after properties would have been attached.
It is therefore crucial for the farmer to first weigh the pros and cons of borrowing and also have a clear picture of the revenue or results expected after expending the borrowed capital. It does not pay to borrow because a neighbour has done so and recorded impressive results.
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The safest thing to do is to try and seek advice from the neighbour on how she would have successfully invested the borrowed capital to later spawn the impressive results.
While all this is happening, the farmer must not take his attention off the need to manage both the fixed costs and production costs to allow the business to increase profits.
To improve profitability in an increasingly competitive and volatile environment, farmers must develop a deep understanding of their profit drivers and put tactical management plans in place.
This starts by identifying the farm's profit drivers, which is critical in analysing the capacity of the business to withstand adverse conditions, capture opportunities and to make informed expenditure decisions.
The farmer must also increase production, attract higher prices and/or lower costs of production to maintain or increase profits being generated from his enterprises.
Infact, knowing the financial capacity of the business is an important tool to employ when considering additional debt or capital expenditure.
