The drivers of farm business success - key stories from farm business benchmarking

Author: Phil O'Callaghan | Date: 10 Oct 2013

Phil O’Callaghan

ORM Pty Ltd        

Keywords: benchmarking, profitability, costs, income, farm business.

Take home messages

  • Rising cost trends are placing greater pressure on farm businesses to achieve higher yields and prices to maintain profit margins. Understanding the cost structures and income performance trends of the farm business should be an integral management practice when planning for the upcoming season.
  • Best profit is achieved when breakeven income occurs in more years, and profits are maximised in the good seasons. Information that helps farmers plan how much of their estimated income should be spent on the various cost areas can help minimise profit volatility.
  • Aim to integrate the production system with an appreciation of the resources available, the people’s needs and financial health of each business.
  • Be aware of the business variables and adapt to suit your individual business. The best business structure and farming system for one farm may not be the best for a neighbouring farm.

How is your farm business really traveling financially?

Are you performing adequately? What are your cost and income trends? How does your farm compare with other similar farms? Where should you concentrate your efforts to get the most improvement?

To answer these questions many growers often end up relying on intuition or subjective and generalised information rather then objective analysis of their specific farm.

Farm profitability is crucial for farm business and community sustainability. If a farm is not able to return regular profitable outcomes then it becomes increasingly challenging to continue to operate. Profit is a relatively simple concept; it is the money left over from the income generated after meeting the expense obligations for a given period.

One of the challenges is that the amount of income earned is usually not known until many months after most of the costs have been incurred. The level of income earned can also vary significantly from earlier projections as farmers seek to manage both production (rainfall, frost, pest, grain quality etc.) and marketing (global commodity prices) variables.

Maintaining profits when there are long-term rising cost trends

Long term trends for farm costs and income for Northern NSW show that cost trends have more than doubled from 1989 to 2012, as illustrated in Figure 1. Income generated for the same period has also increased at a similar rate.

Figure 1. Average farm costs and farm income trend for Northern NSW farm comparison group.

Figure 1. Average farm costs and farm income trend for Northern NSW farm comparison group.
($/farm/year).

This analysis indicates that farmers now spend twice as much to maintain the same profit margins they were a generation ago. 'Rolling a much bigger dice' at the start of the season has put pressure on today’s farmers to deliver the income needed to offset higher costs.

Improved business analysis reporting using Ag Profit

Ag Profit provides farmers with a high standard of farm business analysis reporting so they can readily understand the performance dynamics of their business. This includes cost structures, drivers of profit and debt servicing capacity.

When costs increase incrementally from one year to the next, the impact on the profit margin may not seem significant, or even noticeable. However, when the cost trend is analysed over a longer period, such as five or six years, then the impact on profit becomes more apparent. Ag Profit provides longer term analysis and charts for most of the key performance indicators so that visual trends are readily available. The longer term analysis also helps reduce the influence of an anomaly year.

Since 2007 farm income in Northern NSW varied from $600,000 to $2,000,000, confirming the importance of managing income between seasons when maintaining financial health. Fluctuating income and related losses in low income years require farms to hold financial buffers including equity in fixed assets such as land, or in liquid assets such as Farm Management Deposits or off-farm investments.

This large fluctuation in income also requires careful cost monitoring to ensure there are more profit years than loss years.

Comparative analysis puts individual performance into context

Ag Profit reports include comparative analysis feedback using the quintile analysis shown in Figure 2.

Figure 2. Farm operating cost indicators as a percentage of farm income, showing the performance of the individual farm business (blue needle), group average (grey needle), and top profit group (purple needle).

Figure 2. Farm operating cost indicators as a percentage of farm income, showing the performance of the individual farm business (blue needle), group average (grey needle), and top profit group (purple needle).

Comparative analysis helps with paddock and enterprise selection

The role of the business manager, amongst others, is to facilitate the uptake of new technology and farming practices enabling the business to sustain and enhance the profitability of the farming business in so far as it meets their goals. However, what is appropriate for one farmer may not be appropriate for another; individuals can differ in their attitude to risk, are at different stages in the ‘business life cycle’, or are limited by the financial health of the farm business.

A recent study conducted by ORM for the Birchip Cropping Group’s Grain & Graze II project, used Ag Profit data and analysis to illustrate how benchmarking can help individual businesses understand both their own performance and that of their enterprise mix.

This comparative study focussed on the role of livestock in cropping systems, and therefore used livestock income to determine the subsets for comparison. Table 1, 2 and Figure 3 provide a summary of the results.

Table 1. Crop intensity of farming systems with varying livestock contribution to income.

% of effective ha

Livestock  <5%
of income

Mixed crop & some livestock

Livestock  >20%
of income

Top 20% profit Wimmera/Mallee

Cereals

59

54

42

53

Oilseeds

6

4

5

5

Legumes

14

14

10

11

Hay

2

3

6

2

Non-crop

19

24

37

28

Crop intensity

82

76

63

72

Figure 3. Income volatility of comparative farming systems.

Figure 3. Income volatility of comparative farming systems.

Table 2. Farm profit for comparative farming systems.

% of effective ha

Livestock  <5%
of income

Mixed crop & some livestock

Livestock  >20%
of income

Top 20% profit Wimmera/Mallee

Farm income

299

283

278

325

less

 

Overheads

26

31

31

22

Farm inputs

89

87

74

84

Machinery

93

96

100

84

Labour

54

58

71

52

Finance

33

46

36

17

Farm expenses

295

318

312

259

Farm profit

4

-35

-34

66

The drivers of farm business success

Data analysis from southern Australia indicates a number of general trends:

  1. Cropping every paddock every year is less profitable than ‘spelling’ some paddocks.
  2. Low income years result in bigger losses when you’re trying to ‘buy your way out’ of problem paddocks.
  3. Be generous with inputs to your good paddocks.
  4. Livestock can complement cropping.
  5. Good management equals good profit. Cost efficiency is a measure of management and is more important than scale and farming system.

Contact details

Phil O’Callaghan

ORM Pty Ltd

03 5441 6176

phil@orm.com.au

www.orm.com.au