Having a grasp of fixed costs allows growers to make vital management decisions, according to the closing results of a farmer-led project. 4Sight Farming, funded by the Scottish Government’s Knowledge Transfer and Innovation Fund (KTIF), illustrated how profit margins can be improved by knowing machinery and labour costs and using a Lean farming approach to reassess everyday processes.
The aim of the project, initiated by Eric Anderson of Scottish Agronomy, was to capture the true fixed costs of running an arable or potato enterprise and learn more about how Lean thinking, an approach traditionally employed in manufacturing, could improve processes to reduce unnecessary waste of time and money in farming businesses. He said:
“We are not sure what the future holds but we do know subsidies are only going one way and trade relationships are likely to change. The environmental lobby may also alter farmers’ access to red diesel. If profit margins shrink and commodity prices go down, operations with high fixed costs could see prolonged periods of losses. While the majority of benchmarking projects look at production costs and focus on variable inputs, we wanted to focus on the operational costs of machinery and labour. With accurate, detailed records you can make objective, data-driven decisions to minimise these fixed costs and ultimately boost the bottom line which is essential in the unpredictable times we are facing.”
Detailed analysis of labour and machinery costs across participant arable and potato enterprises in Scotland was carried out by EQ Accountants. This gave those in the closed group a perspective on how they compared with other similar enterprises and, through discussion, where they could make changes to improve processes.
The 12-month project, which involved 30 growers from across Scotland, included a ‘boot camp’ on Lean farming, in association with Urban Foresight and Northumberland farmer, Conor Colgan, who did an MBA on the subject. Lean thinking is a practice used particularly in manufacturing to assess where waste and unnecessary time and effort can be eliminated to improve processes and profit. Lean thinking was used in the discussions at the final meeting announcing the project results to see where individual businesses could adjust their approach to reduce fixed costs.
Mr Anderson commented:
“The project showed everyone is different but by having the data it can help each of these farmers determine if a fixed cost is positively or negatively affecting the profit line. They can then make informed decisions about what works best for their business. Priorities were different. For some, it was big machinery or technology that was important for efficiency; others considered selling machinery and using contractors. Some were planning to train staff to be more proficient at their jobs, others believed having modern machinery was key to maintaining them in the business. It’s all about balance, but it’s knowing with confidence how to integrate meaningful actions that will achieve that balance.”
Vicky Tait, who has recently returned to her family farm near North Berwick, said:
“For me the project has highlighted that there is no silver bullet: it’s not expand or buy new versus consolidate or keep old machinery going for as long as possible. What is has shown, however, is that by having accurate records about operating costs for each enterprise you can make decisions based on data and adjust costs accordingly. It depends on what your priorities are on the farm and, what we all agreed, is that we know the soil, the skills, the people and the systems on our farm better than anyone and this will influence where we spend or save. Ultimately, it has been useful to see where we compare to others, but even more so, the discussion and sharing of ideas with peers has been really valuable to thinking differently about how we make sure we maximise the bottom line while staying true to how we want to operate.”
