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Pinpointing labour and machinery costs

Continuing pressure on farm incomes is forcing many businesses to look harder at their production costs.

Labour and machinery make up the largest proportion of overheads in an arable business. They are also however, the area where businesses can make the most proactive cost control. The majority of other overheads can only be reduced by a combination of shopping around and negotiation, but labour and machinery costs can be significantly altered through the adoption of different systems or practices. It is important, therefore, to have a full understanding of their true cost, especially when the margins between profit and loss are tight.

Armed with that information, businesses will find it much easier to manage reduced incomes by becoming more aggressive in their cost management, whether that be by lowering costs, collaborating, driving up efficiencies and creating scale – or a combination of any of these.

Unfortunately labour and machinery are notoriously difficult to allocate to individual sectors of the business. This makes meaningful comparison and interpretation challenging, reducing the chances of effective remedial action being implemented.

So what can you do about this?

Following a surge in demand from clients wanting to gain a better understanding of these costs, we have developed the Labour and Machinery Costings Service, a software package specifically to tackle this problem. The service analyses both overheads in great detail, building up information from the machinery fleet, work rates, fuel usage, labour usage and downtime.

This provides a true reflection of actual labour and machinery costs, which can be monitored annually and benchmarked against similar businesses. The service can be used to predict future performance as well.

In a nutshell, the benefits of the service are as follows:

1. Provides a true cost of production by crop type across multiple enterprises

2. Helps review labour use and efficiency

3. Identifies areas of high cost and where improvements can be made

4. Calculates accurate contracting rates

5. Assesses the true cost of taking on new opportunities

The service has already enabled several businesses to undertake more informed decision making on machinery replacement, efficiencies and business growth. It has helped contractors pinpoint the effect on costs of taking on more land, so they know whether to bid, and if so, how much to offer.

In other cases, they have not proceeded with an offer. One client discovered that his current contract farming and in-hand core business was at a tipping point regarding economies of scale. Had he taken on the extra land, the new business would have struggled to cover the necessary investment and would have required a further step-up in costs.

The service has also highlighted the benefits of collaboration. We were recently approached by four farmers, who were already sharing some machinery, to examine the effects of full-scale collaboration between the businesses under an umbrella company.

They farmed about 1200ha (3000 acres) of relatively light land between them. The plan was to assess the potential for cost savings by reconciling the machinery fleet, pooling labour to reduce five employees to one full time and one self-employed worker. Two of the bigger land providers would manage and work during peak periods, with a further land provider having limited management input.

The Labour and Machinery Costings Service predicted an overall labour and machinery cost of £368/ha (£149/acre) for the business (see table). This is a significant reduction on current levels and compares very favourably with benchmarking figures for our larger clients.

In cost per tonne terms, the new venture’s figures (excluding rent, finance and sundries) work out at around £87/t for wheat, £196 for oilseed rape and £16.55 for sugar beet.

It is worth noting that these figures will vary greatly from farm to farm, depending on soil type, size and business structure. Also, the collaborative venture does not factor in tenants’ management time. However, we have been experiencing higher depreciation rates than stated of late, on the back of some good harvests along with strong grain markets a couple of years ago that allowed businesses to invest in new machinery, so overall the figures make for a reasonable comparison.

Despite this, the venture still has a bit too much fat in the system. We would hope that as time develops we can reduce these costs further, by reducing their machinery fleet and reinvesting on more efficient replacements.

The labour profile for the new business (see graph), based on the two employees and student labour at harvest, identified a shortfall, but showed this can be managed as necessary using tenants’ labour.

The costings service is proving to be a very valuable tool for an increasing number of clients. It can be set up in a few hours and can be updated very easily.

For a few pounds per acre this service allows farmers and contractors to scrutinise their cost structures, helping them to plan effectively, save money and remain efficient and competitive.

All labour and machinery costs for collaborative venture
 

Per Ha

Per acre

Depreciation

94.0

38.0

Repairs

55.8

22.6

Insurance

11.3

4.6

Labour

66.1

26.8

Fuel

56.4

22.8

Contract/hire

51.0

20.6

Total labour and machinery costs

£368

£149

 

Labour and Machinery Costings Service – the nuts and bolts

Base data required for the system includes farmed area, crop type, soil type and area. Machinery data includes a list of all machines on the farm, from the main tractors and combines down to slug pelleters and guidance bars.

Purchase dates, starting values for the year, depreciation rates and repairs, interest, insurance and hours worked are logged. Labour and machinery costs not allocated to specific operations are added back in, producing a highly accurate total cost for each of the above parameters and for individual machines.

Operations are recorded, and include work rate per hour and fuel use and cost, as well as machinery, implement, operation labour and downtime costs.

Once all this information is in the system, operation costs can be drawn up quickly, as can labour costs, including downtime, to provide a total cost per acre, per crop or per tonne, for each operation.

An accurate farm labour profile can also be constructed that reveals periods of surplus and shortfall, so preventative action can be taken well in advance.

Although an enormous amount of data can be produced and accessed, the results can be expressed in dashboard formats, which can be customised to each business. These highlight key data in a range of easy-to-interpret graphics, allowing rapid assessment of the findings.