Generating more profit from your farm business

Page last updated: Tuesday, 18 September 2018 - 10:08am

Please note: This content may be out of date and is currently under review.

Managing price to drive profit

In most businesses, changes to price have the largest impact on profit, marginally ahead of production volume and costs. This is largely because any increase in price will flow directly into the business as profit net of any sales commissions or levies. In our case study example a 1% increase in price lifted pre-tax profit by almost 4% (refer to the case study for a worked example).

The market price of most grain and livestock products is largely driven by global and local demand and supply fundamentals. Agricultural producers do not ‘set’ the prices they receive. Prices for many agricultural commodities are highly volatile and difficult to predict. They are influenced by the unpredictability of global weather conditions and subsequent impact on global and local production (that is, supply). Prices are further impacted by changes in the exchange rate.

There is opportunity to improve profit through active management of both downside and upside price movements. Any marketing strategy or plan must take into consideration both whole of business cost structures and potential production levels under different seasonal scenarios.  This helps identify price ranges to target for your marketing and selling decisions.  It also assists with the decision making around opportunities presented by ‘price spikes’ created by uncertainty around global production.

Management strategies available to assist in managing price risk and to improve the average price received include:

Marketing tools and sales strategies
  • Increasing your marketing skills and knowledge or seeking professional support.
  • Monitoring of the global and local markets, to take advantage of opportunities to sell as they arise, that is, use volatility to your advantage.
  • Having marketing plans in place with strategies on how to respond to changes in price and season.
  • Forward selling to lock in a favourable price for a proportion of production. However, you need to be confident in ability to deliver the volume of grain/wool/lamb under contract.
  • Considering derivatives, such as swaps and options to manage price risk.
  • Selling as close as possible to the consumer (direct) to by-pass part of the supply chain and associated costs.
  • Selling produce through time, price averaging.
  • Targeting niche markets.
  • Establishing a brand that is recognisable and associated with attributes desired by the consumer.
  • Identifying and, if possible, selling into market windows when prices are typically higher. This may involve changing production schedules (for example, time of harvesting, joining). However, the opportunity needs to be weighed against any additional costs or yield penalties associated with meeting this market window.
  • Timing the sale of your product and holding some grain/wool as stock so you can sell if price spikes without production risk. Retain grain/hay as feed if drought occurs and/or don’t get caught being forced to sell in a weak price market. The cost of holding stock needs to be considered including the opportunity cost of what cash could have been invested in.
Production planning
  • Using decision support tools like Yield Prophet® to help you to better understand the likely production based on seasonal conditions to date and seasonal outlook.
  • Controlling or managing the quality of produce to avoid downgrades or penalties.
  • Producing ‘premium’ quality products to improve price (blending grain, grass fed livestock, managing yield/protein relationship).
  • Diversifying the enterprise mix to reduce the whole farm profit impact of a significant downward price correction in one commodity.
For more information

Contact information

Tamara Alexander