Revenue Potential & Why It Matters
Knowing what your farm's resources can produce for revenue is key for budgets
There is no business without revenue. Revenue will drive most of your farm business. While margins matter and without profit, your business will not survive long, revenue is the underlying support for your financials. If your farm is not bringing in revenue, nothing else matters as then it’s a hobby.
Farming is a primary industry where raw materials are transferred into products which are then sold. This means that access to those raw materials is critical. Revenue is dependent on two things, output and price. In many parts of agriculture, we do not have much control over the price. We can, however, control output.
Output can be constrained by several variables but for farms, it will be resources such as land, infrastructure, feed reserves and time in addition to factors such as microclimate and location. Thus, it is essential to know how much your resources can produce. Price still matters but your starting point will be output.
Output Determination
The process of determining output starts with evaluating what your raw resources can do before natural constraints. I like to start with the following questions and research:
Does my local climate allow this plant or animal to grow?
Under average conditions, how much of this plant/animal could my land support?
If you have something being produced indoors, what is the structure capacity? Do I have the infrastructure to grow this plant/animal?
What is the average loss for my production? This would be mortality for animals, pests and weather damage to crops.
Do I have to purchase any inputs to grow this? Do I have access to those inputs? Are there chronic supply issues with any of the inputs? How much production loss would I have if I can not purchase enough of those inputs?
Do I need to retain any of my production for next year? This would be replacement females or seeds.
Do I have the time or labour available to grow the maximum or is there a constraint there as well? How many hours per week does it take to ensure my operation is running as best as it can?
How much can I invest to grow my operation if needed? If I need to purchase livestock or more land, consider financial constraints on output.
This is a lot of information to work through and it can be done in stages. The questions should lead to more questions and more research, especially if you are considering a new type of production. As a reminder, land access does not necessarily mean that you own the land you are involved in your calculations, lease arrangments and grazing contracts can dramatically improve your ability to produce more.
Working Reality
Determining your output will look different for every farm. Two farms could be side-by-side and have the same number of acres and still produce different levels of output due to constraints like labour and capital investment. There are also situations that are simply not realistic such as growing no.2 yellow grain corn outside in the Yukon territory.
For most crops, there is yield data available by the region. Many of these are available from provincial agricultural ministries or commodity organizations. Access to inputs should be factored into your output calculation. In a year like 2023 where fertilizer costs are likely to remain high, this could result in lower yields.
For livestock producers, the species and sometimes even the breed will impact output. If you have cows and your product is a stocker calf, you have a limit of one calf per cow per year. Your output is easy to calculate, the number of calves available to market depends directly on the number of cows you own. So if you have 50 cows, the absolute maximum you could sell is 50 calves but likely you would have less available after accounting for mortality and replacements.
You are then further constrained by your access to feed, time and infrastructure. Can your farm support those 50 cows? This is what’s going on with our farm, we don’t have enough land or feed access to have more ewes than we currently do even though the barn could house more. Once you work through all of the constraints, you will have a fairly good idea of what your farm can produce, realistically.
Price Research
You can move into price research once you have determined your realistic typically expected output. The output does have some influence on price, larger producers can access different markets than smaller producers. Smaller producers may have access to higher-value niche markets. There are numerous databases available on historical pricing for most commodities. For sheep, Ontario Sheep Farmers has extensive details on their website. Beef Farmers of Ontario offers similar information. Several larger elevators and traders have pricing information available.
This part of your research should focus on actual data. Facebook does not count as market research. You may have to pay for access to information if you want historical data. Figuring out your output's value at the point of sale will take some effort. Meet with potential buyers, go to the live auctions and check out what other farms in your area are charging. It is key to look at a range of data and work with averages.
Once you have a price, we return to the revenue formula of output multiplied by price. This is the final stage, where you determine the revenue potential of your resources. Take the prices that you could reasonably expect to get for your production and multiply that by the realistic amount of output your farm can produce.
Based on the 50 cows used earlier and the assumption that you’ve determined that you do have enough land, feed and time to have that many, we will add some more factors. Industry mortality is 7.8-11% and you will be keeping your 5 nicest heifers each year to account for culls and improve your herd. So you’ll have 41 calves available for sale. If prices have been averaging $2.50/lb for 500lb stockers, your farm’s potential is $51,250 in gross revenue.
In Practice
Wanting to gross $1mil with your farm is a great goal but you do need to know how much resources that will take. $1mil with lambs is going to take a lot more than $1mil with corn and soybeans. It’s important to remember we are talking about revenue, not profit or net income.
If you have the goal of farming full-time, you need to know what the revenue potential is of your farm to determine if your goal is feasible. If your production output is simply too low to support your goals, you need to find out what is constraining it and how will you grow that. If your personal cost of living is $55,000; those hypothetical 50 cows with a revenue potential of $51,250 will not allow you to quit your day job. Your personal cost of living will need to be funded by the profit which will be a fraction of the revenue.
Change the Variables
If you have calculated your revenue potential and that result is not suitable for you, you can work on changing your variables. Not all of the factors controlling output or even price are outside of your control. If your output is limited due to labour or capital investment, there are solutions. You can also expand your land access, it may just need some creativity.
I used this example recently for the Master Shepherd’s business planning workshop and it illustrates it well. If you need to market 500 lambs per year to reach your revenue goal on an annual lambing system with 1.5 lambs per ewe average, 15% mortality and 20% retention, you need 490 ewes. But your farm maybe can’t support 490 ewes. If you go accelerated, you can cut down to 327 ewes with the same genetics (as long as they do lamb out of season) and get the same result on a lower whole farm input requirement as 490 ewes will always eat more than 327 ewes even when accounting for the additional nutritional needs of accelerated ewes.
Know your Numbers
At the end of the day, it’s important to know the potential of your resources. Most of your decisions will be impacted by what kind of output your farm can produce.
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2022 Cost of Production numbers, the results are in for the sheep
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If you are working on your farm business plan and are looking for insight and assistance, please reach out!