It is rare for a farm business not to have an articulated plan for improvement – but many simply make no improvement year on year.
It is not because farmers need yet another key performance indicator nor is it a shortage of professionals offering analytical and planning services. We argue that a lack of structure results in analysis that can seem conflicting and unconvincing. Here we describe Farmax; a service for sheep beef and deer farmers that has a unique and highly structured approach to business analysis and planning.
An outside view
Farmers often feel in the prime position to identify opportunities. This is not always the case. Their job is often long and physically tiring which is not always the best spring board for long evenings dedicated to business planning.
It is not just a matter of time; farmers are not the best unbiased judge of their own performance nor are they an endless fountain of good ideas. An outsider’s view can be the most valuable investment in business growth through new ideas and innovation.
The more difficult challenge for farmers is in choosing the right person and knowing how best to utilised them. Who will be able to work with them and their family to develop a united vision that will drive their profitability and with it their aspirations for retirement and farm succession?
Farmax is a tool used by a network of trained and accredited farm management consultants. It is focussed on the engine room of farm production and how this can be significantly tuned-up. It also includes a system for monitoring and on-going improvement.
A system approach
Business planning is now an important part of a farm consultant’s offering. Both because it is valuable work and it sets the context for the consultant to add value into the future. The core to any business plan is a clear assessment of the current situation and the best strategy for achieving the owner’s objectives. If the assessment or the strategy is wrong the business plan could be a roadmap to failure.
There is a variety of methods consultants use, most relying on benchmarked Key Performance Indicators (KPI). Starting at a high level they compare the profitability of similar properties and at a lower level detail how the livestock enterprises can be improved.
In the example below the farm is below the top 20% where it really matters - its economic performance. Looking at some KPIs many are already good. This leaves a gap between the vision and how the farmer is to affect change.
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Farm A
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Top 20%
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Gross Margin $/ha
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386
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760
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Product per hectare (kg)
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236
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422
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Gross margin per kg of feed eaten by sheep
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8.2
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7.6
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Gross margin per kg of feed eaten by cattle
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4.5
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4.6
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Lambing %
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155
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132
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Cattle weaning %
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83
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85
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Table 1. KPI analysis of the existing situation
A good business plan displays a structured understanding the farm system which should be easy enough; farming is after all a simple industry. However, in the sheep, beef and deer industry what sets the good from the great is an understanding of the multi-dimensional nature of the production system.
As an example of this multi-dimensional nature Farm A has analysed its KPI’s. It concludes more revenue is possible and considers a finishing enterprise that returns twice as much as other enterprises on the farm. A popular method of expressing this is in terms of revenue earned from grass eaten. The farmer decides to develop this enterprise and decrease others.
Figure 1. Effects on a system of changing and enterprise
However, some unfortunate feedback mechanisms occur (Figure 1). The finishing enterprise needs a higher pasture cover to achieve its targets. But as pasture cover increases so does pasture decay meaning less pasture for stock. Stock are carried well into winter before they can reach a saleable weight. This restricts feed for other enterprises in early spring. The farmer anticipates this and buys in some supplements to reduce the impact. The net effect is a reduction in farm profitability.
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Farm A
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New
Scenario
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Gross Margin $/ha
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386
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341
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Product per hectare (kg)
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236
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248
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Gross margin per kg of feed eaten by new enterprise
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NA
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12.5
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Gross margin per kg of feed eaten by sheep
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8.2
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7.6
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Gross margin per kg of feed eaten by cattle
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4.5
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4.6
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Lambing %
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155
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132
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Cattle weaning %
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83
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85
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Table 2. First year into business plan
Quantifying these feedback mechanisms is a complex business. The trick is to develop stock policies that fit with a farms feed supply pattern. A stock policy is the set of decisions that govern its daily demand for feed such as breed, stock class, buy/sell dates, lambing/shearing dates, liveweight gain targets.
A farm is often unique in its feed supply. It has different mixes of potential – perhaps a high proportion of shady aspect hill country that has good summer growth in an otherwise dry environment. Perhaps river terraces with deep soils ideal for growing high yielding crops for summer finishing.
Farm A is no doubt wondering what the top 20% are doing. We argue they may be doing many different things ideally suited to their situations. An arsenal of KPI’s may not help tailor the right strategy for Farm A. How do we then proceed?
More commonly professionals use rules of thumb and this is often what Farmers ask for - “in your experience what should I do?” And, professionals with a long career in the business can provide good value by offering rule of thumb advice.
We however see two weaknesses. Firstly, rules of thumb can never always be right thus the analogy with the thumb as a ruler. But just as important it leads to a “Guru-style” of providing consultancy with the risk that a single person holds the knowledge. The farmer gets what he asks for but not what he needs. The advice simply seems unconvincing and in truth the consultant is still learning and is more effective as part of the team learning environment.
What the farmer may need is to be continuously developing an understanding of the empirical reasons why things work or do not work.
The structured modelling approach
Using the model
It is in assessing the current situation and exploring strategies that Farmax is specifically designed. Farmax has as its core the Stockpol model first developed by AgResearch in 1988 then later re-developed by Farmax into the Farmax Pro, Farmtools and Farmax Lite suite. The structure of this model has proved highly successful in commercial use.
The user sets up land units and their likely pasture growth rates including when growth occurs – is the block cold, does it have dry summers or high growth rates in spring?
The user then sets up the livestock enterprises and the performance targets. These performance targets are determined by the liveweight profiles in each month. This in turn determines how much they must be fed. From this Farmax calculates whether a farm will be feasible - does the future pasture cover support the livestock policies? This feedback mechanism ensures that stock can not achieve the unachievable.
The consultant and the farmer use the model in an interactive manner. It is a game where stock policies are chosen and adapted to fit the uniqueness of the farm feed supply. Winning involves discovering ways that farm profit can be significantly increased:
- How well does feed supply and demand fit?
- How efficient are the enterprises in converting pasture into money?
- What other enterprises will improve the feed supply and demand fit?
- What opportunities are there to manipulate or increase feed supply?
- What flexibility is needed for periodic variability in feed supply?
Once the strategy has been finalised the consultant will set the farm up with a specific model for the coming 12 months. The farmer uses part of the Farmax system to record monitored information about the farm. At any time the parties can re-assess if changes are needed and quantify the value of these changes in dollar terms.
At the end of the year the model has been transformed into an actual record of farm performance. This is then used as the starting point for the next 12 months in a continuous modelling – monitoring – evaluation - modelling approach.
A structured approach
In a structured modelling approach the scenario considered previously would not have made the cut. While the livestock now earn more per kg of pasture eaten, and are more efficient at converting pasture eaten into product it is an inferior farm system because:
- The feed supply and demand fit badly and less of the potential pasture growth is realised;
- More supplements are required reducing the gross margin per kg of product.
This is succinctly shown by the return per kg of potential pasture production.
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Calculation
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Farm A
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Scenario
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Questions answered
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Gross Margin/ha ($)
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386
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341
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How much revenue will be generated per ha after variable costs?
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Potential Pasture Production (t/ha)
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8.6
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8.6
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How much grass would the farm produce if feed supply and demand were optimally fitted?
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Decay
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1.8
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2.4
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Net Pasture Production (t/ha)
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6.8
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6.2
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How much grass did the farm produce?
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Demand from supplements (t/ha)
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0.4
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1.6
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How much supplements are required?
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Kg Product/ ha (kg)
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236
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248
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A standard industry measure of production adding meat, wool and velvet.
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kg pasture/kg product (kg)
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29.1
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25.3
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How efficient are enterprises in converting grass eaten into product?
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Gross Margin/kg Product ($)
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1.64
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1.38
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What is the value of product produced?
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Return per kg of pasture eaten
(cents/kg pasture)
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5.6
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5.5
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How much is the farm earning from the grass it actually grows?
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Return per kg of Potential Pasture Production
(cents/kg pasture)
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4.5
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3.9
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How much does the farm earn from the potential grass it could produce with an optimal feed supply and demand fit?
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Table 3. Structured output from the Farmax system
In summary Table 3 shows how Farmax compares one with another. It could be comparing the starting situation with the results of the first year. More appropriately it should be showing an analysis of an option that was discarded in the initial business planning process.