It does not just happen by itself that a business is profitable and sustainable. To get it right in practice, several things have to be done right. There are continuous external factors that influence a business positively or negatively and have an effect on profitability.
The struggling South African economy certainly does not create a positive environment within which businesses can stay afloat, let alone grow. Due to the negative spiral of unemployment and accompanying poverty, purchasing power decreases and confidence in the economy declines.
Farmers also struggle to live within their income. Input costs rise out of proportion and because they as price takers have no individual say in influencing or setting prices, there is no guarantee that a harvest will indeed be profitable. It is unlikely that conditions will improve soon. But a farmer needs to make a plan, and here are some tips and issues to keep in mind:
- Make sure you make informed decisions, based on reliable information and sources. There is an explosion of information on social media, but it is often unreliable and unbelievable; even dangerous. Also, watch out for conspiracy theories.
- External events have an influence on our country and businesses. The conflict between Ukraine and Russia, for example, has an effect on fertilizer prices – something that farmers had to take into account.
- Every farmed agricultural commodity goes through price cycles. A healthy, responsible principle is to hedge in the good times – you have to make provision for the lean years. But when you have a large debt load, it is difficult to protect yourself financially against possible risks or losses. Because help from the state is largely absent, however, farmers will have to create bridges themselves. The closest hand to help is the one at the end of your own arm!
- Economy of scale is a strategic approach that in a way can help to build in “inner fat” when things are going well. Due to the brutal reality of input costs and market forces, even a once large enough farm can get into trouble today. If agricultural units or farmers can work together, this can strengthen their position and create a greater negotiating capacity. Yes, working together can be a challenge, but the flip side of the coin is having to stop farming.
- Where different commodities are farmed, each should preferably be profitable. Each branch of farming must contribute to profitability jointly, but also separately. Certain commodities may indeed be retained for strategic considerations, such as when the remains of cereal crops are used for livestock feed at certain times of the year.
- Get expert advisors with a proven reputation in their field to help you with planning, including in the production and marketing process, but also with regard to your estate. It still often happens that an estate cannot be settled when the primary farmer dies unless some of the land is sold. With the right advice and timely planning, this can easily be prevented.
- Security conditions in South Africa have deteriorated drastically. Because the government is often absent in this regard and does not fulfill its constitutional responsibility to look after citizens’ safety, communities are reliant on themselves. Good neighborliness is crucial. Farmers simply cannot afford to split hairs and make enemies with each other over trifles.
- Farmers are entrepreneurs and need to plan properly to make and keep their business profitable. To get this right, all production factors must be properly managed, including raw materials, labor and capital – and today also mechanization and technology – which in many cases can replace labour. Mechanical and technological solutions can benefit entrepreneurs and help reduce the impact of labor insecurity on their farms.
- To make your farming sustainable, it must be profitable. This is how market forces work – if a business makes a loss, the entrepreneur eventually goes under. The production elements that are left behind can then be used by someone else.
- There is an important distinction between optimal profit and maximum return. The principle of the law of diminishing returns applies here. An example: When more fertilizer is added to a crop, the crop yield will initially increase noticeably. However, the question is: What did it really cost to get the bigger return? The cost of the fertilizer eats up part of the profit and therefore subsidizes it. With thorough planning and expert advice you can save on unnecessary input costs.
Farmers are our country’s greatest asset, because they put food on the table of every consumer. Not everyone realizes this – apparently neither does the current government. Meanwhile, the conditions are getting worse and worse. The only way to overcome this is for us to join hands for the right reasons, make better plans and create our own future.