Fixed cost disparity: HAU placement student Rachel Croker investigates

Huge disparity remains between the best and worst performing farms. Effective fixed cost management can be the difference between profit and loss. Wilson Wraight recently conducted a comparative analysis exercise for harvest 2016 – comparing a range of arable fixed cost structures to examine the effect on profitability.

In the example below Business B has a pre-finance profit of over £370/ha, while the poorer performing Business A has a £20/ha pre-finance surplus. One of the main differences between the businesses is the level of manageable fixed costs particularly labour and power. There is approximately £130/ha difference between the total power and labour cost. Over 700 hectares this equates to £91,000.

		Business	Business
		A	B
Farmed Arable Hectares		706.00	697.70
		Per Hectare	Per Hectare
LABOUR
	Regular	125.4	71.3
	Casual	11.3	30.8
	Sub total	136.7	102.1
POWER
	Machinery Depreciation	103.5	75.5
	Leasing
	Machinery Repairs	32.6	45.1
	Fuel	49.6	43.0
	Vehicle Tax		1.4
	Contract & Hire	98.1	21.6
	Haulage
	Sub total	283.8	186.6
TOTAL POWER & LABOUR		420.5	288.7

 

 

Labour – Both businesses have no family labour. Business B has less full time staff but more temporary labour to cover peaks in requirement. As a consequence, business B farms a higher number of hectares per man unit.

Power – Both businesses own a combine and self-propelled sprayer. Business A owns a trailed sprayer in addition. Business A operates two tractors and supplements this with two hired machines. Business B also utilises two tractors but only hires in an additional one at peak periods. Business B with older kit has much less depreciation but only marginally higher repairs.

While both businesses are similar sized cereal based farms on similar soils, sizeable disparity exists in their cost structures. There is no one size fits all answer to fixed cost management but this exercise highlights the need for more focus on this often neglected but highly important area.