Analyse machinery and labour costs to capture potential savings

Analysing machinery and labour costs and considering different approaches to managing these can help farm businesses reduce their fixed costs.

Machinery and labour account for 30-60% of fixed costs in some farming systems and are often where the most savings can be made, says Rob Meadley, agri-business consultant at Brown&Co.

Through its work with private clients and the AHDB Monitor Farm programme, Brown&Co says it is apparent that costs in these two key areas are continuing to increase.

“They are big cost areas and, with inflationary pressures, are ever increasing, from the capital cost of equipment through to repairs, and the overall cost of labour and wages,’’ said Rob.

But they are areas in a business that can offer good potential for savings, he added.

“Fixed costs are now actually a bit of a misnomer because variable costs such as seed, fertiliser and sprays are relatively static or fixed depending on cropping, we can actually have more control over labour and machinery costs.’’

During a recent Brown&Co podcast with agri-business consultant Olivia Burfoot, Rob said the main cost challenge is the capital expenditure on equipment, from combines and harvesters to tractors and sprayers.

Then there are issues with labour availability and staff retention.

Retaining and attracting good staff can create wage pressure and there are other costs to be considered too, from training to meeting health and safety obligations.

“Everything from fuel prices to machinery repairs - the cost of getting somebody out on farm now to do a repair is very expensive in some cases – add to the costs farmers are facing,’’ said Rob.

“Farmers need to understand where those costs are in the business so that they can manage them and make better decisions in the long run.’’

During the podcast, Rob considered options for how those fixed costs can be reduced.

“If the top range model is too expensive and the data shows that you are not going to get the output from it, are there alternatives that are better, a different model or brand?’’

Utilise capital allowances during a good year. 

Some solutions, such as retaining machinery for a year or two longer, have their cons as well as pros.

“If we do continue to keep that machine are we going to price ourselves out of being able to purchase new, or do we change our strategy and look for good quality second-hand or ex-demonstrators?’’ Rob questioned.

“We have got to be careful of that depreciation curve and meeting repair costs in terms of overhauls and things that might go wrong.’’

There is the option of extending a warranty on older machinery but the agreement needs to be carefully reviewed, he added.

“We need to understand the terms and conditions, will the warranty actually cover what we are expecting it to?’’

For ‘big ticket’ items such as combine harvesters, Brown&Co has facilitated agreements among farmers for shared ownership. 

Rob admits this approach is not for everyone though. “You have to be with the right partners, but shared ownership is an option and Brown&Co can draw up agreements that allow this.’’

If machinery costs are just too high when balanced against income, it may be necessary to explore a complete system change, such as forming a joint venture or contract farming, or restructuring to allow capital to be redeployed elsewhere in the business.

Understanding costs will help businesses capitalise on opportunities, such as pitching for farm business tenancies and contracting, or ensuring the business is charging enough for operations.

“Don’t undersell yourself, the quoted contracting figures in the press do look high but that is the reality now,’’ Rob advised.