There are two main ways cost of production information can be used to improve business performance.
Comparing your own farm’s CoP information to standard industry or peer data is the main way of highlighting potential issues.
By highlighting the cost areas that are significantly different to other similar businesses, you can focus management time on these aspects to determine the reasons and plan any necessary action.
There may be good, sometimes unavoidable, reasons why certain costs are higher than industry standards, but accepting that decision should be an informed choice that may require compensating for in other areas of the business.
Examples of resources to help benchmark costs are summarised at the end of this article.
“Benchmarking is all about challenging what you do with financial and physical resources and understanding what you can change to make the biggest difference,” says Ian Bailey of Savills rural research.
His tips for using benchmarking information are:
The biggest scope for improvement is often in machinery and labour costs, but Mr Bailey urges against focusing on any one area in isolation.
For example, high depreciation charges may appear to suggest the farm is “over-equipped”, but equally it could demonstrate a willingness to invest and drive productivity.
Likewise, low depreciation costs can be indicative of a streamlined setup or simply reflect ageing equipment, lack of investment and increasing repair bills.
In such cases, other measures, such as the ratio of depreciation: repair costs are worth considering.
Equally, skilled labour remains a key component of a successful business, and retaining/ attracting good staff often comes at a price.
Mr Bailey favours expressing costs as a percentage of output rather than on a £/ha or £/t basis, as this can more accurately reflect the extra value being delivered to the business from a higher cost structure.
“Management or labour costs might be higher than others on a pounds per acre or hectare basis, but if the returns are higher as a result, it is a worthwhile investment.”
The image below shows how costs as a % of gross combinable output can vary between farms.
Understanding exactly how much it costs to produce a tonne of any crop is essential for informed marketing decisions.
The total CoP is effectively the “break-even price” and provides a good steer as to when best to sell grain, either on forward contracts or spot markets.
Attitude to risk is a big factor in the approach to marketing grain on any farm, but knowing the true CoP is invaluable for achieving a profitable price.
Many farm business consultants offer financial benchmarking services and publish results of their own benchmarking surveys.
There are also several online options that allow farmers to compare results themselves.
Defra Farm Business Survey
Scottish FBS data is published at https://www.gov.scot/Topics/Statistics/Browse/Agriculture-Fisheries/Publications/FASdata
The Farm Advice Service (FAS) also publishes whole-farm benchmarking data for different Scottish farm types (including specialist cereals and general cropping) and sizes, allowing farmers to compare their results https://www.fas.scot/whole-farm-benchmarks/
Costings books such as the John Nix Pocketbook or the Agro Business Consultants Budgeting & Costing book are other useful sources of farm management data to compare your own farm's performance against.
In the second of our series on costs of production in agriculture, we look at the use of yield maps to reduce your production costs.
With diminishing direct support for agriculture and increasing exposure to competitive world markets there has never been a better time to focus on production costs.