A profit driver or a profit enhancer?

Posted by Brendon Walsh on 24 August 2016

What are profit drivers and profit enhancers? Farmers, you’d better get clear on this or you will always have massive variation in your farm business results, and you will likely feel some lack of control on those results. Let me explain.

In a recent article a farmer elected representative said: “Obviously lack of profitability in the sheep meat industry is an ongoing concern and this has been highlighted by the outcome of B+LNZ’s North Canterbury Sheep for Profit Partnership programme. The 10 participating farmers lifted productivity by an average of 20% over 4 years, while their profitability fell by 1%. This frightening statistic highlights to me that the industry urgently needs to be extracting more value out of the marketplace, and this is where telling the story of New Zealand farming comes in. We all have a great story to tell – we just need to get out there and tell it.”

Firstly, well done to those farmers for putting themselves out there and backing themselves to get a result. Secondly, I agree totally about the NZ story – we are generally pretty poor at this. Merino NZ’s John Brackenridge is trumpeting the same message – great stuff and give it heaps guys! Extracting more value from the market place is essential and I applaud efforts to get this done. However, as a farm business owner you can’t expect to have a great business by just relying on lifting productivity and waiting on the telling of the NZ story to extract more value from the market. Farmers reading the words from the above article will, I fear, get a skewed message because the trouble is that productivity and greater market value extraction can enhance profit but they don’t drive it!

If a farmer focuses on things that enhance profit but not the things that drive it, they will always be playing catch up or be at the mercy of things beyond their control. That shifts energy away from the drivers. What most tend to miss is that the profit drivers are much less sexy. So, what actually are they? Check out the 6 Profit Principles in full (outlined here), but here is a quick list:

1. Have your strategic business plan and develop the skills and resources to achieve it. 
2. Be clear on the available livestock profit periods throughout the year. 
3. Have funding sorted to receive profit from profit periods. 
4. Enable optimum pasture and soil conditions to be available for profit periods. 
5. Fully feed quality profitable livestock during profit periods. 
6. Be set up to capture future profit opportunities. 

A profit period occurs when animals create a change in value (over any particular time frame) greater than the share of all farm working expenses allocated to them through the Dry Matter (DM) they eat over that time frame. The farmer then needs to bank that spare value change as captured profit by selling the animals while they are profitable. This must be done whether the markets trend up or down, whether the climate is kind or unkind or whether the NZ story is being told well or poorly. In other words, if farmers really want profit they must be doing everything they can to generate it, regardless of those other outside influences. This gives them the greatest chance to bank profit under any conditions. Then, the enhancers when understood can add to that basic profit management. After all, you don’t want to carry profit animals into a time when they are eating DM for a value change lower than the cost of the DM they are eating. You lose the DM for no return, in fact a loss!

The great thing is the above drivers apply to any sheep and beef farm operation be it breeding, trading, finishing or grazing.

Here are a few enhancers that may be familiar to you: higher lambing percentages, as much feed utilised as possible, as much feed grown as possible, greater amount of product produced per ha, more lambs sold for higher prices in the spring, having lots of high energy crops for times of low pasture growth, and others. None of these things actually line up one to one with creating profit but they may be beneficial after the drivers are taken care of.

Interestingly, the fact that the result of the study referred to above is described as “a frightening statistic” suggests the author was unprepared for it. Understand profit and this kind of outcome is no surprise. Whatever you do farmers, understand and take care of the profit drivers first, then look to enhance them!

If you are curious about how the GrowFARM® System can help sheep and beef farmers generate the profits they really want, contact me here.