Almost all the livestock farmers that I know love working under the sun, taking care of their animals and running their own autonomous farm businesses.

Despite the numerous challenges they face, most wouldn’t trade this with any other occupation. Because farming has become a part of them, as much as they have become a part of the land.

But the ugly truth is that today, most livestock farmers aren’t earning enough profits from their farm business.

Do you agree?

Yes, increasing global competition, production costs and ecological uncertainties all eat up into your profit margins. But there are a few things, under your control that can help you run a successful and profitable livestock farm business.

Yet most farmers and farm advisors seldom talk about them. It’s almost as if they are secrets. Let’s talk about three farm management secrets that can help you become more successful.

Farming a Competitive Advantage

In business, there’s something called as the barriers to entry. In practical terms, it means how much effort, learning and investment is needed to replicate a particular business.

To further understand barriers to entry, let’s look at a fictional example. Let’s look at a third-generation dairy farmer in rural Australia, on 236 hectares of inherited farmland, who farms 250 dairy cows and sells milk to the biggest dairy cooperative in the country.

Now imagine that someone else also wants to do the same thing.

A compoeitor needs the knowledge, technological and domain understanding to progress
Figure 1. A compoeitor needs the knowledge, technological and domain understanding to progress.

What do they need to do?

To enter the same farm business, the competitor needs to figure out how to get some land, cows, farming knowledge and the ability to sell produce.

Which of these are hard to obtain?

Yes, the land is costly today, but one can still get good lease land deals, even today in rural areas. So that’s easy to figure out. Yes, buying cows requires a lot of money, but it’s not a show stopper, some savings and a bank loan can take care of that.

Nor is it hard to figure out how to sell the milk to a dairy cooperative. In my opinion, the hard-won knowledge about farming animals in that particular region, acquired over several decades and generations, is the hardest to replace. But even that can be addressed to an extent if the competitor hires a good farm hand and advisor.

In other words, our fictional dairy farmer is running a business that has low barriers to entry. A business, that anyone with access to some capital can replicate easily. And that’s bad news.

Don’t get me wrong. I’m not saying that all dairy farm businesses are bad.

I’m only saying that any business that can easily be replicated cannot be successful for long. That’s just how our economic system works.

So a critical question then becomes:

How to increase the barriers to entry?

Or even better:

how to gain an unfair competitive advantage that isn’t easy to replicate?

If you dig deep enough, you’ll realise that all successful businesses, across industries, have at least one competitive advantage that cannot easily be replicated. It could be their patents, scalable low-cost production system or in some cases even high-value customer relationships.

Maybe our fictional farmer also begins to think on these lines. Maybe he chooses to adopt low-cost pasture-based production systems as his competitive advantage.

Or maybe he chooses to move up the value chain and make gourmet cheese out of his milk. Or maybe he even ditches the cooperative and affiliates himself with a startup that helps him sell his produce directly to set of local consumers.

As you can see there are no perfect or right answers here. Each decision comes with its own set of pros and cons. However, the central point remains to be true. To be successful, you need to nail down your unfair competitive advantage over the others. And figuring that out is any business owner’s biggest creative challenge. I hope you figure out yours soon.

Navigating with the Profit Compass

Next, let’s talk about your profit compass. If you’re running a business on planet earth today, you’re in business for profits. If not, you’re running a hobby, a costly hobby maybe. But nevertheless still a hobby. Because any business without profits isn’t a serious business.

Profit is the yardstick, the true north and the guiding star of your farm business
Figure 2. Profit is the yardstick, the true north and the guiding star of your farm business.

Imagine for a moment that you’re an explorer (business owner) in unchartered territory (your market) trying to locate a treasure trove (success). Without a compass pointing north (profits), you would quickly get lost among the trees and obstacles (problems) of the land.

In other words, profit is the yardstick, true north and guiding star of your business. All decisions need to be taken with respect to how they affect your profits.

So, measure EVERYTHING that affects your profit margins.

And I mean everything. This includes your pasture, animal feed intakes, production, labour and all other operational expenses.

You may not like to do certain things. You may not like measuring your pasture growth, every week. You may not like to record farm inputs or grazing events. You may not like to analyze which pastures need how much fertilizers or irrigation. Yet you have to get all of this done.

Because running a successful business isn’t just about adoring the animals you love or doing the outdoor work you love. It is about being disciplined enough to do what is important.

And profits are as important a thing as it gets, in the world of business.

A savvy business owner or manager is always aware of three data points
  1. Your cost of production
  2. Your profit margin
  3. What your market pays

No one other than you will know those data points. Sure, others might have opinions, but they are often meaningless.

Because others won’t know what profit margins you require. For instance, if you’ve taken on debt, your margins need to be able to pay that off eventually. And because only you will know your true cost of production. For instance, a period of drought can significantly increase your production costs.

So the point again is that you need to measure everything that affects your profit margins. You absolutely need to know this, down to the last cent.

Once you know this, you’ll quickly be able to differentiate the profit-making activities from the big sucks. Only then would you be in a better position to address the big resource drains.

After all, why not focus your efforts elsewhere, where you’re getting better results?

Cash Flow Reality

Did you know that profitable businesses can also go out of business?

Or even get bankrupt?

I know that this doesn’t sound right, but it’s true.

Several businesses that had attractive profits have gone bankrupt.

Why?

Because of poor cash flow management. Because they couldn’t cough up enough cash when they needed it the most – think repaying debt, or paying staff salaries.

cash flow is even more important than profits
Figure 3. But cash flow is even more important than profits. Think of it as the lifeline of your farm business.
Sounds crazy, right?

Let me put it to you this way.

Let’s say you started a beef cattle farm. Your pasture-fed beef gets a lot of positive feedback and reviews. And maybe a well-known local retailer wants to partner with you. All good so far.

But the only catch is that the retailer wants five times more produce than what you can currently offer.

What do you do?

It’s a lucrative and profitable deal.

Why give up on such an opportunity?

So you take a deep breath, borrow additional debt and scale up your production to meet the demand. But quickly, you realize that your low-cost pasture-based production system doesn’t work any longer at this scale. So you buy additional hay and feed to supplement your pasture.

All in all, the additional costs of debt, feed and increased production begin to suck you dry. Eventually, unable to repay salaries and the debt, the farmer is forced to sell all his animals before maturity at a big loss. Maybe he’s even forced to sell some of his assets to repay everything.

Let’s stop this nightmare now.

But you get my drift right?

It doesn’t matter that you have a huge profitable payout waiting for you in the end.

You need to first get there alive, don’t you?

So a profitable business can also go bankrupt if cash flow isn’t managed well. When you don’t have healthy positive cash flows, you’re already on an edge.

And what happens if there’s a calamity such as theft, fire or flood?

You’re doomed.

On the other hand, with better cash flow management, reserves and surpluses, you might be in a better position to deal with such calamities. And as we both know, such unexpected losses are bound to happen at some point in time, because that’s how nature works.

That’s why cash flows are as important as your competitive advantage and profit margins. And that’s why the old adage of CASH IS KING still rings true across the business world, even today.

That wraps up the three farm business management secrets that I wanted to share with you. I hope this was useful. But even more importantly, I hope that you take action and apply what you learnt in your farm business.

If you’re interested to learn more about understanding the finances of your farm business, consider reading this free farm management guide. I wrote this to help livestock farmers like you, to manage your farm businesses more effectively.

If you have any questions, please do leave them as a comment below. I promise to personally answer them.

Until we meet again, Happy Farming!

- The Dedicated Team of Pasture.io, 30 September 2020