Determining farm viability is all about the numbers - The Bottom Line

Gary Pike jokes that when he talks to prairie grain farmers, he often ends up “scaring the bejeezus” out of them.

He does that by telling them that if they want to earn a decent living, they should be cropping 5,000 acres.

That’s a monstrous amount of land, nearly 21 sq. kilometres, but according to Pike, it’s just about the perfect size for a single family wanting to earn a decent income and perhaps bring a child into the farm business.

“That’s just a really nice handy package because it’s got one four-wheel-drive tractor, one air drill, two combines, a couple of tandem trucks and a big pull-type sprayer,” says Pike of Pike Management Group in Lethbridge.

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Decades of disappointing financial returns have pushed grain farmers into the forefront of what the corporate world would call “rightsizing.”

Pike says determining the viability of a farm is all about numbers. More specifically, it is fixed costs , which he defines as everything except seed, fertilizer, chemicals, and crop and hail insurance, that really grab your attention.

For some farmers, fixed costs can run as high as $180 per acre.

Pike argues that to be viable over the long term, that number has to drop to $105 or less. He’s also got clients with fixed costs as low as $83.

That’s a difference of nearly $100 per acre, or $100,000 per year for a 1,000-acre farm.

Imagine if grain farmers made that kind of money.

Forget new pickups and taking the motor home to Arizona for February; everybody would be driving Hummers and jetting to the French Riviera for the winter.

Of course, you can’t get that kind of efficiency on a conventional 1,000-acre grain farm. It’s not the right size.

Lee Erickson realized he couldn’t do it on 4,200 acres.

The Donalda, Alta., farmer worked with two financial consultants Ñ Pike and Myers Norris Penny Ñ to get his numbers right.

He opted to go to no-till, sold his old seeding equipment and bought larger equipment. Now he crops 5,600 acres and spring seeding means going at it 24 hours a day for 20 days at a stretch.

The consultants aren’t incidental to the process, because knowing your costs isn’t good enough Ð you have to know what they mean. Consultants use benchmarking, financial ratios and, perhaps most importantly, their experience to guide farmers in the rightsizing process. For example, are your repair bills in line with your peers? If not, is it because your preventive maintenance budget is too low, or is it a case that your equipment is too old and investing in newer equipment would be more cost-effective?

Naturally, a lot of people who have seen Erickson’s mighty rig can’t resist needling him about his big-spending ways. A new outfit would cost $400,000 or more.

“That has happened so many times,” Erickson says. “Guys say, ‘man, I don’t how you do it, you’ve got all this big equipment.’ “

He’s willing to tell them about how he saved $16,000 alone on sweeps and shovels for the cultivator in his first year of no-till.

Or how he cut his fuel bill by nearly $4 an acre because his 450 hp tractor uses less fuel on a horsepower basis than his old 375 hp models.

Erickson once sat down with a doubting neighbour and showed him that his 1,000-acre farm had fixed costs that were three times higher on a per-acre basis than Erickson’s.

Rightsizing isn’t necessarily about getting big. For some, the realization they have “too much iron in their diet” leads them to sell equipment and hire neighbours to bale their hay or spray their crops. Others have moved to no-till or reduced-till to reduce fieldwork.

Experts decry the fact that so many farmers either don’t know their costs or haven’t bothered to find out how they stack up against others.

Perhaps they don’t want to know. Perhaps they don’t want to even contemplate that unnecessary expenditures have caused tens, perhaps hundreds, of thousands of dollars to leak away over the years. That thought would scare the bejeezus out of anybody.

Glenn Cheater is editor of Canadian Farm Manager, the newsletter of the
Canadian Farm Business Management Council. The newsletter as well as archived columns from this series can be found in the news desk section at www.farmcentre.com. The views stated here are for information only and are not necessarily those of The Western Producer.