Analysis of your tactical Target Yield and Target Price this season can help drive your farm business profitability goals.
Our family enjoy a good game of cards when we get together on holidays. One of our favourites is 500. Most times it is played with fun and reasonably light-hearted joshing. Occasionally, it can become a little more intense!
For those who are familiar with the game, you will know the exhilaration of picking up a good hand and then trying to win the bid and get your hands on the kitty! But no matter how good your hand, you are playing with uncertainties – your partner’s hand and the opposition’s hands, and what is actually in that kitty. Sometimes what seems a winning hand when you picked it up can be brought undone by an opposition who can cross-trump on you or a kitty with nothing worth picking up. The converse is also true, thankfully, that sometimes what seems a very average hand can win spectacularly. It all depends on how the cards fall. But if you never take a risk and bid, you are guaranteed never to win!
Managing for farm business profitability by analysing your target yield and target price has many similarities to a game of cards. If you have done all your business analysis from the previous season, you know what is in your hand to plan for the current season. You have one eye on the horizon, or where you want to business to go, and the other firmly on how the current season will help you reach those long-term goals. You are also dealing with uncertainties, however. The kitty could be identified as the weather you are subject to as the season unfolds – it could provide a huge bonus or be a disaster!
So what strategies will help you as you ‘play’ the hand you are dealt this coming season?
Setting shorter-term goals for the season ahead is just as critical. And the type of questions you ask of your business is critical in helping to determine the action that needs to be taken as well as the potential outcomes you can achieve.
So what questions should you ask about your farm business at the beginning of each season? If you don’t ask the right questions, will you get the answers you need?
Knowing your Cost of Production: Benefits and Limitations?
Industry focus tends to be on knowing your Cost of Production (COP), or how much it actually costs your business to produce a set amount. For example, wheat might have a $180/t COP and wool a 650c/kg COP.
What is the benefit of knowing your Cost of Production?
There is a clear role for this information. If you know the COP for each enterprise in your business, you know at what price levels you need to sell in order to achieve break-even.
The challenge with COP is that it is significantly influenced by the season you experience. The better the season the lower the COP, and vice versa. However, it is useful to understand the range of COP for each of the commodities you produce for the range of seasons.
For long-term farm business sustainability, as well as achieving many of your long-term goals, you will need to be aiming at more than just break-even. If your goal is to build business profitability, Cost of Production is just one part of measuring business performance. You will need to achieve constantly above COP to achieve wealth improvement in the business.
Benefits of Using Target Yield and Target Price
To be smarter, use the COP concept but rather than looking at just break-even, look at the target profit you want to achieve. This is measured by analysing your target yield and price.
What yield do you need to produce from each enterprise in your farm business, and at what price do you need to sell, in order to achieve a targeted profitability? This is a different way of business thinking, but it does focus your ‘within season’ management decisions while you look to achieve these targets. It focuses your agronomy, animal husbandry and marketing.
To do this analysis, you will need specific information about your business:
Area of each enterprise.
Cost structure of the business such as enterprise gross margins, loans, overheads and family drawings.
Alternatively, P2PAgri takes this concept and applies it to your individual farm data for you. P2PAgri allows you to set your profit level and calculates what the target yield and target price of each enterprise needs to be to achieve a specified target profit. Change the profit desired, and it automatically re-calculates the target yield and target price required.
Essentially, this is an advanced sensitivity analysis which is aimed at the ‘whole business’ performance and not just at the individual enterprise level, which is the traditional use of sensitivity analysis.
This added information will help you remain informed on what really drives your business profitability. It also helps to significantly sharpen your goals for the season, which is a very powerful tool for the long-term success of your business.
P2PAgri helps you operate your farm business more easily. Setting smarter goals will help refine your target profit even more.
Many experts tell us that writing your goals down, rather than just thinking about them, is a far more powerful method to help you achieve those goals. It allows your sub-conscious to also work toward achieving them.
SMART goals is a framework that helps you to ask the right questions of your business when developing your goals:
S – Specific: Are your goals specific to your own farm business? The more specific and more focused your goals, the more easily they can be tracked and communicated with your work team.
M – Measurable: Can your goals be easily measured so that it is clear when they are achieved?
A – Attainable: Can you break down your goals into more manageable steps?
R – Realistic: Is achieving your goals realistic enough that you really believe you can achieve them and not give up when challenges occur?
T – Timely: Do you have a clear time-bound deadline for achieving your goals to keep you focused and accountable?
If you are interested in the financial performance of your farming business, one of your goals should be a target profit for the year. For example, ‘I want to achieve a $150,000 profit for the season’.
Yes, this goal is set before we know the season type and market environment for the 12 months ahead, but at least it provides a focus. Also, if you know what target yield and target price you need to achieve, then you are on your way to achieving this target profit.
Getting back to our game of 500, you know that you want to win the game, but you face uncertainty about the cards your opposition has and what talent they have in playing them. Similarly, with a target profit, you know what you are trying to achieve, and you have a good idea what production and price levels you need to achieve, so you are better equipped to deal with the uncertainties the coming season may bring.
P2PAgri can help you do these technical business calculations by helping you set your target yield and price for coming season.
Check out these calculations on our P2PAgri demo! To find them, go to SEASON level, Reports, Management and then Target Profit.
Or to find out more, get in touch as we would love to help you with any part of your farm business management.
Mike Krause is one of Australia’s leading Farm Business Management consultants with significant experience in providing farm business management support, training and consulting to Australia’s agricultural and agri-business industries.
This experience forms the basis of significant developments:
‘Farming the Business’ manual Mike produced for the GRDC.
‘Plan to Profit’, the successful desktop software developed and sold by Mike over 12 years.
P2PAgri, our new online platform for farmers and advisers. Check it out on www.p2pagri.com.au.