How to have a low-price strategy for your arable business
A third year of near-record production has left us with a stocks to use ratio at a 15 year high and prices at a six-year low. At the time of writing the Funds were the big sellers of futures and apart from the effects of El Niño bringing rain to the USA, it’s difficult to see what is going to lift market prices. Many farmers are undersold at the moment compared to normal as they hang back in the belief that prices can’t get any lower.
We are probably at the end of the commodity super-cycle and need to prepare for a period of low prices – all seems to be doom and gloom, but in past low price eras, one of the key positives to come out of them is the creation of opportunities. Those more efficient producers who are prepared to plan and adapt their strategies to the circumstances have been able to consolidate and expand as others fall by the way-side or look for alternatives to farming their land themselves.
A ‘low price strategy’ isn’t necessarily that different to a normal strategy – however a normal strategy for many farms is none at all, or ‘always done’. Without the high price cushion to protect your business, having a strategy or plan becomes more important, and increasingly ‘always done’ just isn’t good enough.
A low price strategy has to start with knowing what your costs are – how much is it costing you to produce a tonne of grain? And how that cost is made up – seed, fertiliser, sprays, power and machinery etc? Then look at the market and decide what you think you are going to get paid. Once you know the two figures, you can start to plan how to bridge the gap – can you reduce your costs, increase your yield, find a premium market, negotiate an increase in your borrowings or, more likely, a combination of them all?
Yogi Berra said: “If you don’t know where you’re going, then you might end up someplace else,” so making these initial assumptions is crucial to make sure your business ends up where you want it to be – profitable and growing for future generations.
Knowing your fixed costs – labour, power and machinery and overheads, which collectively make up around 60 – 65% of the total costs, and then doing something about them is likely the most challenging. Cropbench+ can help you with that and getting involved in your local Arable Business Group can help with what to do. The key thing is to keep an open mind when looking at how to reduce them, especially when looking at alternatives such as using contractors, machinery sharing or joint ventures – consider their relevance to you and your business, cost them out and then if you still decide to sit on a new 300hp, top of the range tractor to cover your 150 ha of crop, then at least it’s an informed decision!
Marketing (or selling) can make the biggest difference without actually changing your business structure. Having a sales plan designed to increase your average, rather than the risk in waiting for the big one (and usually getting caught at the bottom) is important as every £1 counts when prices are low. Using tools such as forward selling is also important, provided you understand what you’re doing, and if not get someone who does to help you. The difference between the highest and lowest price in a season can equate to over £400/hectare with a reasonable yield!
Maintaining high yields and quality can make things much easier in a low price situation – more tonnes = more cash and if you can capture any quality premiums, then more cash again. Paying attention to agronomy becomes critical, and is an area where cost cutting should be done carefully and with a clear picture of the implication of each cut as well as the cost benefit of each spend.
Having a sideways look at your cropping plan can often be a beneficial exercise, as we all tend to stick to a plan which we’re comfortable with – too often changing it through fashion, rather than a cost benefit, e.g the number of people introducing cover crops without understanding why or even identifying the problem on their farm which they are supposed to be resolving.
When end prices are low, simplifying a cropping plan can often create opportunities to reduce fixed costs, with fewer and/or more focussed machines and passes required. While the gross margin may be less, the net margin can be higher.
At the other end, extending or diversifying your cropping plan can open up new markets which are less influenced by commodities, such as fuel for AD plants – forage rye, fodder beet, maize, grass etc. In this instance it is important to identify a local market and then grow what it can use, what suits your farm, and importantly a crop which doesn’t require additional investment in specialist equipment, or alternatively cost in a contractor.
None of the above is particularly new, radical, difficult, or even that interesting and in fact we should be doing all of the above as a routine.
The key difference during a low price period, in the current environment where we have increasing volatility, changing weather patterns, increasing regulatory burden and reducing support, is that we NEED to do it.