Understanding the context in which we farm provides a sound base for making effective management decisions .
One context that has changed over time is the margin over costs, and the margin continues to decline.
Consider what has happened in the last thirty years since the 1980’s. And thirty years is less than one generation ago
In the 1980’s, costs on most farms were commonly 40 per cent of income, leaving a margin over costs of 60 percent.
Currently, costs on most farms are approaching or exceeding 70 per cent, leaving a margin over costs of 30 percent.
What you can do with a 30 percent margin over costs is quite different to what you can do with a 60 per cent margin over costs.
In a business, the margin over costs is very significant because it is the amount available from operations to service debt, for living and for investment. A 30 percent margin is spread thinner, compared to a 60 percent margin.
Some factors to be considered when farming with a 30 percent margin over costs are
- The scale of operations needs to increase in order to produce an adequate total margin.
- Working capital requirements increase
- Risk increases
Some questions to ask are ?
- Are debt levels sustainable ?
- Can the business meet the existing and proposed debt repayment schedules ?
- Should some funds be kept in reserve, and if so how much ?
- When the downturn comes, and it will, how will the business be funded?
The trend to declining margins continues. That is the context in which we farm.