ADDING COSTS CAN INCREASE PROFITS, SOMETIMES
Originally published on July 25, 2002
Having a good handle on costs is a key attribute of any successful farmer. Does this mean the good farmers avoid costs while the other farmers simply incur them?
No, of course not.
Successful farm managers have the ability to identify those costs, which if managed wisely will lead to an increased net return.
As an example, let's look at the cost of desiccating a lentil crop. The desiccation of lentils involves the application of a registered chemical called Reglone at a custom applied cost of about $17 per acre.
The result is a more consistent drydown of the crop and weeds, as well as better seed quality.
Incurring additional costs when the return is so narrow is difficult to accept. Some farmers will justify a decision not to desiccate by saying the additional cost would have reduced the return that would otherwise have been available.
If you will be collecting your crop insurance guarantee, this reasoning makes sense.
If you have an average to above-average crop, this reasoning is not always sound.
In the accompanying table, I have identified the three harvesting alternatives available to the lentil grower.
The first is to conventionally swath. Swathing peas or lentils remains the most difficult part of producing the crops.
Even with the addition of pick-up reels and vine lifter guards, "slow and easy" remains the mantra. In this example, the net profit is $ 62.40 per acre.
The second alternative is to straight cut the crop that has dried down naturally. With early maturing varieties and if the weather stays hot and dry, this may be the way to go.
However, if the weather doesn't co-operate or if the crop becomes lodged or doesn't dry evenly, we may incur losses due to shattering and unthreshed green pods. This example produced a net profit of $67.40 per acre.
Third, a farmer can straight cut a desiccated crop. After an application of Reglone the crop can be threshed in seven to 10 days. This alternative proves to be the better one. By spending $17 per acre for the desiccation, the farmer secured a profit of $85.16 per acre. This profit is the direct result of a yield increase of 10 percent and a better overall grade, thanks to reduced debris harvested with the seed.
I recall neighbour Harold riding with me one harvest as I swathed peas.
After the first round, he shook my hand, wished me luck and with a grin said the experience had made him that much happier to be growing wheat.
There can be no cost generalizations as to whether you should desiccate your crop. In farming, each year is unique.
When you make the right decision in the right year, you look awful smart. If you make the same decision in the wrong year, you are more apt to be humble the next time.
Allyn Tastad, chartered professional accountant, is a partner in the accounting firm of Hounjet Tastad Harpham in Saskatoon at 306-653-5100, e-mail at email@example.com or website www.hth-accountants.ca. All data and information provided is for informational purposes only. Readers are cautioned that laws and regulations are subject to change. Consult your accountant for current professional advice tailored to your situation.