Foresight for Successful Cropping Systems:

Achieving Profitability With or Without Government Support

By Zachary Fore,
U of M Extension Cropping Systems Specialist,
forex002@umn.edu

It isn’t news to any of us in agriculture that the federal government has contributed greatly to net farm income in recent years.  I was surprised, however, to learn that in 2000, government payments comprised around 50% of net farm income. Fifty percent!

We are becoming used to AMTA, double AMTA, and loan deficiency payments.  Is it a problem that the government is contributing so much to net farm income? The government seems to think so. Current rumors suggest that the federal government would like to cut its contribution to agriculture by half or more. This certainly would have a serious effect on net farm income.  These facts have caused me to wonder what would happen if the government pulled out of agriculture all together.  How would we, or could we, respond to that?

Last summer I did a seminar for a group of students from various countries around the world.  A few of the students were from Australia.  They indicated that their government had essentially pulled out of agriculture. As I see our government reducing its support for agriculture, I am caused to wonder if Australia could serve as a useful model of how to survive without government support.  I voiced this thought to Prairie Grains editor Tracy Sayler, and it wasn’t very long before Tracy supplied me with some information on how the Aussies are accomplishing it. He sent me an Australian publication titled “How to Run a High Profit Farm,” published by Holmes, Sackett & Associates (www.hs-a.com.au), a farm business management consulting firm in Wagga Wagga, New South Wales, Australia. Some of the key points:

Key Point: Focus on what you have control over.
Quotes: “If you spend a reasonable amount of your time reading, listening, and talking about things like prices, interest rates, government policy, and so on, you have taken your eye off the ball.  You are concentrating on things over which you have absolutely no control and are therefore wasting your time.  Your net cost of production is under your total control and it is the main issue that should concern you.  Your day to day effort should be directed towards controlling it to achieve industry best practice benchmarks.  If you can do this, you will be a success.”

Key Point: Manage cost per unit of production.
Quotes: “The overriding consideration must be to know and manage your cost of production.  You must be so efficient and have your long term cost of production screwed down so tightly that you will be profitable no matter how low the prices drop.”

“The best managers, almost without exception, realize that being mentally unprepared and uncompetitive on cost of production poses the greatest risks of all and, as a result, focus heavily on these. If you strive to emulate this approach, you will be well on your way to success.”

Key Point: Production is the key to minimizing cost perunit of production.
Quotes: “There is far more potential to improve income by boosting productivity than there is in cutting expenses.”

“If expenses which are cut adversely affect profitability, you lose badly.”

“With such a potential for large parts of the industry to improve their productivity, it is obviously not justified to conclude that as an industry agriculture has productivity issues under control and the next focus is marketing. The reality is that the largest gains in profitability for agriculture will come from much greater emphasis on the productivity issues, of which the key measure is cost of production. Good marketing is still reasonably important, but the fact is it will not save you if your cost of production is too high.”

“If costs are relatively similar between the average and top 20%, why do the average producers experience such volatility in their profitability? The reason is the yields they achieve and their resultant cost of production.”

“For the average producer to improve their profitability, they need to focus predominantly on achieving higher yields.”

Take Home Messages
I have reviewed many farm operations and studied volumes of data, and with or without government support I have come to many of the same conclusions as the Aussies.  There is no magic bullet. The take home messages are clear:

•  Focus on what you can control.
•  Know and manage your cost per unit of production.
•  High yields are essential for low cost per unit of production.
•  You can’t afford to be average. Strive to be in the top 20%.