Be technically & economically efficient or you’re out!

When times are tough, farmers have to become and remain technically and economically efficient.
Issue date : 23 Janaury 2009

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When times are tough, farmers have to become and remain technically and economically efficient.

A farming enterprise must generate enough income to pay for inputs used in production, to buy new capital equipment or pay the annual instalments, service long-term loans and still have enough cash left over for everyday living expenses. This implies that it must generate a positive nett disposable income. Table 1 (right) shows farmers how to calculate nett disposable income and gives an overview of the health of a business. Negative nett disposable income is not sustainable. Farmers should complete this table at least once a month, although extensive livestock farmers may find that once a quarter or even once every six months is enough.
Farmers have to manage all the factors that determine nett disposable income and any factor can create problems if it is out of control – household expenses that are too high have been the downfall of many farmers.

Importance of technical efficiency
Technical efficiency is a prerequisite for farm profitability and sustainability. If total farm expenditure exceeds gross production value, it is no use trying to address the other factors. Restructuring debt will not solve problems on a technical level.
Technical efficiency means a farmer must produce the maximum quantity of produce possible with a particular set of inputs.

Technical efficiency: production guidelines
There are different ways to determine whether a production process is technically efficient. Production guidelines from agricultural scientists can help, but comparisons with other farmers who produce under similar conditions are probably a better guideline.

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Since first having been applied by Xerox in the US in 1979, benchmarking has become a buzzword, recently also in agriculture. The process of benchmarking does not differ much from the traditional approach of comparison with the top-third producers in a group, as promoted by the agriculture department. There are industry benchmarks available for some crop and livestock enterprises, but it is important for farmers to personalise the specific benchmarks.

New technology allows farmers to improve efficiency, but it is difficult for them to keep up-to-date with all new developments. SA farmers have access to a lot of free technical advice from input suppliers, which can be good or bad, depending on the education, training and personality of the adviser. Frequently money spent on a consultant is money well spent. Successful farmers also often establish a panel of advisers and have regular meetings with them, to exchange ideas.

Economic efficiency
When margins are under pressure, it is easy to make wrong decisions. Saving on feed, fertiliser or seed normally reduces profitability. You can increase profitability if the income from increased production exceeds the cost of production. Lower production generally means lower profitability. Economic efficiency depends on technical efficiency. The price of inputs and products determines whether a farmer operates profitably. If production costs exceed the gross value of production, a farmer’s loss will increase if he produces more. However, he will continue to produce in the short-term if his income exceeds production costs, even if it does not cover the full cost including fixed cost.

In this case, higher production will result in fewer losses than when farmers curtail production. Agricultural prospects have deteriorated since the high product and relatively low input costs of 2007/08, putting tremendous pressure on farmers. But those who manage to maintain and improve the efficiency of their enterprises will survive to take advantage of the next agricultural upswing. Dr Koos Coetzee is an agricultural economist at the MPO. All opinions expressed are his own and do not reflect MPO policy.   |fw