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Business inputs and outputs [Finance
Posted on November 27, 2012 @ 05:39:00 AM by Paul Meagher

I recently attended a presentation by Dr. E. Ann Clark (retired U. of Guelph) on the future of framing at the Agriculture Campus of Dalhousie University in Truro. One of the main slides that she presented depicted the gross revenues from farming in Ontario steadily going up since 1920 while the net revenues went up until around 1950(?) and then started to go down. Presently, net revenues are slightly positive if you add government support, and negative if you don't. Of course there are farms in Ontario that do well, however, if we look at averages the farm sector in Ontario is not doing well. This was the starting point she used for her talk about what needs to change in order for Canadian farming to have a future.

So if gross revenues are steadily going up, where is all the money going? Basically, the cost of farming inputs (fertilizer, seeds, equipment, etc...) are going up faster than farm revenue, and, at the same time, because of extreme consolidation among buyers of farm products, farmers must be "price takers" rather than "price setters" for what they produce. In other words, the middlemen on the output side of farming are arguably getting more than their fair share of money as well.

There are lessons here for businesses of all types in terms of how to run your business. One lesson is not to believe much of the received wisdom about how to operate your business because farmers have been listening to the agricultural schools about the need to buy modern seed, fertilizer application rates, and the proper machinery to use. Much of this research has been sponsored by the seed companies, fertilizer companies and equipment manufacturers so there is some collusion in the advice provided. The advice certainly has worked out well for farming input suppliers. So, use your common sense and keep grounded and frugal when operating your business, and do not listen to the latest hype about how to run your business. In farming, this means, for example, using manure as your fertilizer and grass feeding your animals as much as possible instead of paying for these inputs. Also, there are benefits to including livestock with your cropping system (lowered fertilization costs, lowered soil preparation & weeding costs/time, enterprise-staking, etc...), rather than just operating a cropping system.

Another lesson is to keep an eye on your input costs and make sure they are in line with your net revenue, not your gross revenue. It is easy to believe that you need bigger and better equipment because you are producing more and bringing in more money; however, you may also be spending proportionally more to achieve that higher level of production so the net effect of these purchases can be negative on your bottom line.

Another lesson would be to eliminate as many middlemen as you can between you and the consumer so you can reap top dollar on the product that you produce.

So let the farming industry act as a cautionary tale for your business and the role of inputs and output costs in determining your bottom line. I have much of respect for farmers and their business acumen so don't take this as a criticism of farmers in that regards. Farming is a challenging industry to succeed in right now, but I'm optimistic that new structures of farming will emerge to coordinate farmers and consumers in more direct relationships.

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