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The big picture Australian Turf producers have to deal with similar economic issues faced by most farmers around the world – the cost price squeeze. To avoid going out of business farmers are looking to increase income (volume and/or price) and decrease production costs.
The trend in the United States and Australia is for turf farms to seek efficiencies or niche market/higher value turf types or suffer cost price squeezes.
Larger farms have the advantage of lower costs per unit and higher returns per hectare than smaller ones and this confirmed the “large-farm” advantage. For example, a self employed Australian turf farmer was able to make a living off two hectares ten years ago. Now the area required is approximately eight hectares and the price received has from around $5.00 per square metre at farm gate to $3.00 today. It will make it more difficult for smaller producers to enter the market unless they have a guaranteed, established market right up front. Smaller and larger producers are finding it increasingly difficult to compete due to overproduction. They are resorting to price cutting and are facing an unsustainable business future.
The economy of scale gained by larger farms is significant and can make a difference in cost of production between large (>40ha), medium (>20ha) and small (<8ha) producers in the order of 15-20% per hectare. This will vary depending on the variety of turf grown.
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A look at investment costs illustrates the economies-of-scale advantages large turf farms have over smaller operations. Startup capital investment averages for a small farm can be 40-50% higher per hectare compared to a large farm. Annual operating costs can be on average 20 to 30% less per hectare for a large farm. It will take the small farmer twice as long as the large farm to realise a profit assuming all new equipment is purchase.
But whatever decision you make, increasing your operation, your price or cutting your costs, you have to know what creates your income and what costs you have.
The price of turf is a direct result of the cost incurred and the profit margin you wish to maintain. The profit you make needs to be related to the assets or investment in your businesses. This information is important to assist you make management decisions such as obtaining finance, assessing returns compared to other business opportunities and comparing with industry benchmarks.
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Some turf producers may be surprised at the little profit they make and the poor return on investment when they considered all costs when calculating profit.
For example a group of turf farmers in the US analysed their costs and were surprised to find that their selling price was not much more than their production costs. Businesses were proceeding year after year with the vague idea that they were making more money than they really were. Their analysis highlighted a complete accounting of all costs is necessary. It is essential that all turf producers understand the way to calculate profit and have a good recording system. By accurately calculating profit you be able to monitor and control costs throughout the year.
Businesses that do not monitor and control expenditure will find operating costs blow out, profits decline leading to the easy way out by reducing turf prices. Reducing operating costs through cost control will help producers’ supply consistent pricing to customers even in uncertain market conditions.
Turf producers that cut their prices and do not know their real cost of production face the risk of cutting their price too much. To make any business decisions it is important to know your income, your costs and your profit. Turf Producers must be aware of what effect price cutting can have on your bottom line. A 10% cut requires a 40% increase in sales in order to make the same gross margin. What some producers do not understand is that fixed and variable costs do not go down with price. A continual price cutting war will send many turf producers to the wall.
