Take the lid off profit potential
GroundCover™ Issue: 126 | 16 Jan 2017 | Author: Rebecca Jennings
Grain growers are learning what gives the top performers among their peers the ‘edge’ at a series of GRDC workshops delving into profit drivers
Agribusiness consultant Simon Vogt had a clear message at a recent ‘Opportunity for Profit’ workshop at Booleroo Centre, in South Australia’s Mid-North: “Low-risk, highly profitable agriculture is achievable.”
It is every grower’s goal, but because not everyone reaches it with the same level of reward, a GRDC-funded project is looking for the management decision-points that separate the top-performing businesses from the rest. The project is already showing that opportunities exist for most growers to extract higher levels of return from their existing resource base.
The Australia-wide project has collected five years of benchmarking data from 300 farm businesses across 14 agro-ecological zones to identify key profit drivers.
This information, combined with grower phone surveys, was used to identify “top 20 per cent producers”, based on return on equity (southern region) or return on assets managed (northern and western regions).
“Knowing the key performance targets and understanding what is possible is the first step to enhancing profitability,” Mr Vogt, from Rural Directions, said.
A summary of profit drivers and a management guideline are now being developed for each cropping region and agro-ecological zone. These will be delivered to growers through workshops run by the national project coordinators: Rural Directions in South Australia and the Victorian Mallee; Meridian Agriculture in southern NSW and Victorian high-rainfall zones; Macquarie Franklin in Tasmania; Corporate Agriculture Australia in the western region; and Agripath in the northern region.
Mr Vogt told growers that there is a clear gap in the financial performance between the top 20 per cent and the average farming businesses in each zone. “The top 20 per cent regularly generate returns on investment, which are between one-and-a-half and three times higher than the average business in each zone,” he said.
“For example, in the SA Mid-North, the lower Yorke Peninsula and Eyre Peninsula, the top 20 per cent of businesses analysed from 2009 to 2013 had operational returns on equity of 8.04 per cent – almost two-and-a-half-times higher than the average business. The top 20 per cent in this zone generated seven per cent ($61) more cropping income per hectare and invested four per cent ($16) less in variable costs per hectare. This enabled the top businesses to generate a gross margin 16 per cent ($77) more per hectare than the average business.”
Key drivers of profit
This research challenges some perceptions about farm performance, such as the influence of crop type and price received. A ‘top 20 per cent performance’ can generally be achieved with a mix of most crop types and receiving similar prices to other businesses.
A 'top 20 per cent' business is able to generate stronger crop yields from a given investment in variable input costs through optimum operational timeliness and agronomy. however, gross margin optimisation alone is only part of the story. Being in the top 20 per cent also requires a low-cost business model.
“The relationship between enterprise scale and financial performance is also weak, so lack of scale is not necessarily a valid excuse for low performance,” Mr Vogt said.
The project indicates scale is an effective profit driver only when it is successfully matched with four other primary profit drivers – the so-called ‘secret ingredients’ that drive the difference in long-term financial performance.
Nationally, the four profit drivers reflected in the top 20 per cent of businesses are as follows:
- Gross margin optimisation: influenced by total farm income, crop yield, crop rotation, lower spend on variable costs and price received.
- Developing a low-cost business model: structural efficiency (high utilisation of machinery and labour) is influenced by achieving adequate critical mass and embracing enterprise simplicity.
- People and management: take a systems approach to business, strong observation skills and put knowledge into practice.
- Risk management: a resilient business that can withstand production and business shocks (frost, a failed spring, low commodity prices etc) can be developed by identifying and mitigating risks, reducing year-to-year variation in income and lowering the long-term costs of production. Any increase in operating margin reduces a business’s financial risk profile.
“If one of these four primary profit drivers is overlooked it will compromise profit potential and long-term financial performance,” Mr Vogt said. The message for growers across all cropping zones is that there is often ample opportunity to realise greater levels of profitability, he said.
“Many growers have opportunities to increase profitability that don’t cost money or require additional investment in resources. This includes simplifying the enterprise mix, improving timeliness, avoiding low-margin crop choices, block farming and increasing paddock sizes to improve efficiency and implementing more accountable variable cost management.”
An ‘implementation gap’ is also likely to be driving greater differences in financial performance – meaning that although growers have access to information and tools, it is the successful implementation of these that actually makes the difference to the bottom line.
More information:Simon Vogt,
GRDC Project Code RDP00013
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