Farm Ireland
Independent.ie

Wednesday 18 January 2017

Why not band together to get the best deals?

Oliver O'Connor

Published 06/09/2011 | 05:00

We are in the middle of harvest time in what is anticipated to be quite a successful year for most sectors of farming with prices generally up across the industry. However, there are still reasons to be cautious. With the last couple of years being so poor, this year's anticipated results are coming from a very low base. Rising input costs will also have a negative impact on profitability. So are there any solutions available?

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Farming, whatever the type, is seasonal by nature and the related cash-flow follows the same pattern. Planning for next year's crop or calving season will be taking place while the present one is still ongoing. One of the items that every farmer should consider in this plan are the key inputs.

On average, there are four to five basic items that will make up 70pc-80pc of a farmer's expense outlay. Feed or fertiliser will have to be bought irrespective of whether a good year is anticipated or not.

Historically, the majority of farmers have purchased their basic requirements on an 'as required' basis, giving the merchant enough advance notice to have delivery at the appropriate time. While this satisfies the basics, it does not necessarily give the farmer the most advantageous rate available.

Everyone is driving hard for better value for money these days but bear in mind that suppliers of inputs are also more appreciative than ever of bigger orders for their goods and services. One farmer putting in his order for a particular amount of a good will not be able to command as much price negotiating power as a situation where a number of farmers joined together to place a more significant order between them.

Where the farmers normally use a wholesaler to route their purchase through they may consider using the wholesaler to manage the process.

Like the majority of business operations, farmers need to seek out efficiencies wherever possible in order to increase the profitability of their business venture. Anecdotal evidence would suggest that bulk-purchasing as suggested above can reduce costs by 10-15pc which given the large numbers involved is certainly significant. When this is considered for four or five key goods it can suddenly be a very worthwhile saving and justify the significant effort required to make it happen with your neighbours.

The above will generally require obtaining agreement that each farmer who is a party to it taking responsibility for their portion of the purchase. As a result of this the wholesaler will require a significant down-payment upfront so that they will not be left carrying a very significant stock. This can certainly put a strain on cash-flow for a period but it is money that you will be spending during the year in any event and the discount being received should more than justify the earlier than normal outlay.

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Some of the basic items such as fertiliser are increasing in cost on what seems to be a monthly basis. While it is very unlikely such items will fall in cost, the merits of bulk buying outlined above will be reduced where the underlying cost of the particular item falls. While this is most unlikely to occur in the short to medium term, it is a possible risk that needs to be highlighted nonetheless.

Collective purchasing is nothing new. It is basically the ethos of the co-operative on a smaller scale for the benefit of those joining together to form the alliance. This is not a formal partnership agreement between the farmers but rather an attempt by them to utilise their collective purchasing power to ensure a better result for all of them.

We are inundated with commentary in the financial media about the merits of currency hedging etc. The methodology outlined above is a form of financial hedging which should benefit those involved to a great degree. The fundamental philosophy is that a group, acting together, have greater purchasing power than acting individually.

Oliver O'Connor is a director at Grant Thornton, focusing on the agri-food sector. Email: oliver.oconnor@ie.gt.com

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