Profits first, production second - accountant

By Colin Williscroft

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Farmers should never forget that production is vanity and profit is sanity, says Christchurch accountant Pita Alexander.

"Think about your profit margin," he told a Farmers' Big Day Out seminar in Masterton.

"Whenever there is a very sound profit margin on something think about realising it. The profit margin itself is more important than probably anything else such as date, weight or your instincts."

Alexander, who has 35 years' experience as an accountant, said New Zealand farms were characteristically low on profits and high on net assets.

"Farming really is two businesses - a left-hand business owning land, buildings, improvements and term debt and receiving rent effectively from a right-hand business that owns livestock and plant and is the main trading vehicle receiving all of the income and paying all of the expenses, including personal drawings, but excluding interest."

In New Zealand, the right-hand side of the business has not added much to the bottom line in 15 of the past 20 years but the land-owning side has added a lot to the bottom-line net assets during the same period, Alexander said.

"The message here is that you should not be relying on this continuing - the trading side of the business must be much more profitable, such that it adds something to the bottom line in 15 of the next 20 years. Trading profits must be the main driver, even though inflation gains may still occur."

He expected farms to get bigger and more specialised.

"I have found in New Zealand that the large corporate owners never beat my top 10 per cent of family owner-operators in terms of return on capital and economic farm surplus per unit of production, whatever that unit is," he said.

The top corporates came in that next 10 per cent down, achieved through things such as scale, top consultancy advice and sound financing, Alexander said.

During his time working with the farming sector nothing seemed to beat farmers having their own money on the ground and at risk.

Real financial progress was much more about direction than speed, he said. "It is not so important where you presently are, so much as the direction that you are travelling in."

There were likely to be plenty of challenges waiting outside the farm gate during the next 20 years, he told those who attended the seminar at Masterton's Copthorne Solway Hotel and Resort recently.

"Death and taxes are not the only certainties in life - volatility is here to stay and it definitely looks like it will have more effect over the next 20 years than it has in the past 20 years."

Access to water would also become increasingly important. "Nail down your water rights, water easements and water issues now - do not procrastinate in this area," he urged the seminar audience.

"Governments will start to realise that key issues like water storage need a major cornerstone shareholder, which can only be government, partly because of the enormous capital costs, partly because of the long-term nature and lead-in time and partly because of the confidence it then gives parties such as farmers to invest in."

Alexander said fertiliser costs would increase during the next 20 years - because of increased demand and supply.

"A major issue is phosphate, which is just about as important as water to plant growth," he said.

The main supply areas were western Sahara, China and the United States, although China and the US were keeping much of their phosphate for their own use.

- Hamilton News

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