Challenges of the low cereal prices – optimising success factors

Since 2013 wheat prices have fallen from 220 €/t to 150 €/t. High land rental prices, which have been agreed to in the hope of cereal prices remaining high, are posing an additional burden for the farms. Every farm manger should also ask himself: ”How can I react on this situation? Which further optimisation is still possible?”

A cereal prices change always leads to a change of the success factors as shown in Table 1. A 100 % relative share of success equals the difference in the net margin of both success groups (best farms and worst farms). Although the data derives from large-scale farms in East-Germany, the mechanism is also applicable to smaller farms. The farms were sorted using full-cost accounting. All factors were compensated (also the imputed costs like own labour and fixed assets). It can be seen that at times with high cereals prices the higher crop output accounts for more than 100 % of the difference between both groups. In contrary, in the case of low cereals prices a lower yield has not such a significant impact as the extra yield is not reimbursed as much.


Direct costs: little saving potential

The share of direct costs (seed, fertiliser, pesticides) are only between 5 to 18 % and their part in the relative success changes comparatively little (Table 1). However, the question has to be posed how to react on the low cereal prices and where reserves can be found.

Seed: Seed costs offer only little saving potential as most farms have already optimised this matter of expense by working with official home saved seed and adjusted seed rates.

Influence of changing factors on success
Influence of changing factors on success
Fertiliser: Only little savings can be achieved by altering fertiliser usage as fertiliser application rates are already restricted and will be even more in the future due to the new fertiliser regulations. On the other hand inefficient fertilisation leads to decreasing yields and therefore cannot be a long-term alternative. Additionally, cheaper fertiliser, like organic fertiliser or cheap industrial by-product, could be bought. However, organic fertiliser loses its benefits due to continuously increasing regulatory constraints and decreasing inorganic fertiliser prices. Furthermore, the nutrients, which have been bought according to the data sheet, are only partly available.

Plant protection: It is not advisable to save money with herbicides. The danger of building up resistances is too high. In the long run farms with grass problems will have approx. 70€/ha/yr more herbicide costs. However, big differences in the use of fungicides can be seen amongst the farms. Well-adjusted fungicide treatments depending on variety, weather conditions and preceding crop offer great savings potential in comparison to whole-farm standard applications. A spore analysis of the plants or specialised advisory can help to reduce costs for fungicides without a decrease in yield.


Operational costs: Still room for improvement!

Factors determine operational costs
Factors determine operational costs
The biggest change of the relative success factors can be determined in the operational costs. The difference between the 25% best farms and the 25 % worst farms is approx. 15 % during a high-price phase but 40 % during a low-price phase. Therefore, operational costs are an important success factor.

Labour costs indices
Labour costs indices
Labour costs showed the biggest differences. Looking at labour cost indices (Table 3) it is noticeable that the differences are mainly between the efficiency of the employees and not the hourly wages. In this case efficiency means as many productive hours as possible in relation to work time. For example: A tractor driver should preferably spend 70 % of the paid work time on the tractor instead of using it ineffectively for set up and waiting time or work in the winter.

Distribution of working time
Distribution of working time
A sensible reduction of labour costs cannot be achieved by decreasing the on field work hours meaning in less soil cultivation but by spending less time in the yard or on the road. However, this demands a good farm management and efficient work routines (Table 4). Concerning labour costs a good farm management and planning is vital. A certain amount of flexibility can also help if the farm manager, for example in the case of a sudden weather change during harvest, is able to instruct his workers as quick as possible with new tasks in order to keep waiting time at its minimum. However, not only practical work can be optimised but also office and management tasks. Our analysed farms showed differences in the amount of time spend on management and office tasks of 0.5 h/ha in comparison with only 0.1 h/ha of a difference in machinery operation time (Table 4). Additionally, offices and management hours are significantly more expensive. Therefore, this offers definitive cost reduction potential.


Machinery management has the second biggest impact

Sufficient workload and suitable machines has the second biggest impact on operational costs (Table 2). In relation to depreciation the compared farms show little difference. However, more successful farms manage to cultivate their own fields with their machinery and additionally generate a positive result from contract farming.

Hence, they are earning more from contract farming than they are spending. Contract farming means sporadic jobs but mainly full farm management of neighbouring farms. Contract farming can improve machinery efficiency and in times of low cereals prices be an interesting extra gain.

It is not economical to invest into machines which cannot achieve an optimal workload on the home farm. This results in higher depreciations which has subsequently a more significant impact during a low cereal price period. A more favourable alternative to a new acquisition is often to outsource the work or to buy the machines in co-operation with others.

Summary

In the case of low prices it is time to remember the principles of cost leadership.  Farms which have kept an eye on the principle of cost leadership during periods of high cereal prices have provided the best precautions for the present price low. Falling prices also offer a chance to question all habits and to look for new strategies. Adjusting direct costs to low prices is difficult as high yields are still an important part of successful farming.

Lennart Pötting/Cort Brinkmann

Status: 27.12.16



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