Want to double your farm’s net returns? Think five per cent, a Saskatchewan farmer and accountant told farmers attending the recent Ag Days.
By increasing your yield and selling price five per cent and cutting production costs by the same amount, a farmer can boost net returns by 100 per cent, Kristjan Hebert said.
In fact, boosting your farm’s profitability is more likely to happen through small improvements in a lot of things, than it is in one big change.
“As farmers, we spend a lot of time chasing unicorns, and what I mean by that, is ideas that will double our profits in one year or drop our fuel bill in half in one year,” he said. “But, through extensive research, the one thing we have found is that when you make incremental improvements in every step of your operation, it is amazing how those small improvements add up and impact profits in the long run.”
Hebert began his farming career at age 15 and today operates Hebert Grain Ventures, a 7,800-acre operation near Moosomin, Sask. He is also a chartered accountant, and is also the chairman of Global Ag Risk Solutions.
He follows the teachings of Danny Klinefelter, professor and extension economist with Texas A&M University, who developed a paper on the 12 best farm management practices that includes the five per cent rule.
The five per cent rule says that instead of attempting to make large changes to improve operations, it is best to focus on small improvements in multiple areas.
“The five per cent rule is really, baby steps to bigger profits. How we can utilize technology, data and management skills to capture opportunities that make sense for our farms,” said Hebert, who studied under Klinefelter while obtaining a degree in farm management at Texas A&M University.
Through a number of studies, it was found that most sustained success comes from doing 20 things five per cent better, rather than doing one thing 100 per cent better.
“As growers we have numerous opportunities to make five per cent incremental improvements in our businesses,” continued Hebert. “The cumulative effect of a five per cent yield increase along with a five per cent cost-efficiency improvement can have a huge influence on competitive advantage and profitability.”
Research has also indicated that the top quarter of producers, in terms of profitability, tend to be only about five per cent better than the average, whether in terms of costs, production or marketing.
In order to determine where you can begin to make five per cent improvements in your operation, Hebert recommends networking with nearby producers or creating a peer group to develop a benchmark.
“We need to convince ourselves to look for people who are doing it better than us and learn from them. If you aren’t learning from your neighbour, you won’t get better,” continued Hebert. “My favourite scenario is to be the dumbest guy in the room because there is only one way to go.”
Hebert offered up a few examples of areas small alterations could be made, such as increased use of inputs in terms of fungicide or seed treatments, different macro packages of fertilizer.
When it comes to the price of your seed, it might be a better education regarding the negotiation of contracts, relationships with your buyers, justifying inventory and the use of futures and options.
“The biggest alteration area would be in terms of your fixed costs, as this is where farmers have the most control, it can be simple things like sectional control, running certain implements 24 hours to get better acres out of them, proper human resource management so that you have the right people where they need to be when timing is critical.”
As a base case, Hebert says a five per cent improvement in canola yield (from 40 to 42 bushels/acre), selling price (from $10 to $10.50) and cost of production (from $350 to $332.50/acre) results in more than a 100 per cent increase in net return (from $50 to over $108 an acre).
“It is critical to analyze opportunities but also analyze what you are doing now to see if it is working and don’t be afraid to embrace change and find a way to implement it,” he said.