Take the lid off profit potential

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Agribusiness consultant Simon Vogt of Rural Directions delivers an ‘Opportunity for Profit’ workshop at Booleroo Centre, South Australia.

PHOTO: 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

Most people’s crops start out the same, but what happens next in the crop’s management separates out the top-performing farm businesses.

PHOTO: Nicole Baxter

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:

  1. Gross margin optimisation: influenced by total farm income, crop yield, crop rotation, lower spend on variable costs and price received.
  2. 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.
  3. People and management: take a systems approach to business, strong observation skills and put knowledge into practice.
  4. 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.

Tools for growers

The extension component of this project provides tools to assess the performance and profitability of your farm against the top 20 per cent and average businesses in the same zone.

While these resources will be available to growers throughout 2017, here are some broad rules-of-thumb based on the data collected.

In the southern region, the top 20 per cent of farming businesses:

  • Invest about 40 per cent of farm income in variable costs – for example, fertiliser, fuel, contract rates, crop insurance – compared with a business average of 50 per cent. It means the top-performing growers are investing a similar (or slightly lower) dollar value per hectare on the key inputs but they are leveraging 10 to 15 per cent more yield from these investments through better timeliness and agronomy and a disciplined approach to costs.
  • Generate five to 15 per cent more income per hectare through enterprise mix, crop and rotation selection or increased yield.
  • Invest about 25 per cent of business turnover in machinery and labour costs (the average business invests 35 per cent).
  • Generate about $550,000 in turnover per full-time equivalent employee, compared with a $450,000 average.
  • Maintain a higher level of debt serviceability with a debt-to-income ratio of 1:1 rather than 1.5:1.
  • Access leased land in a more cost-effective manner. This is a combination of leasing land for slightly less in $/ha terms (through competing on non-price factors such as having an excellent track record in management, being good to work with and having low credit risk) and then also generating strong yield and gross margin results on the leased land so the lease price being paid, as a percentage of gross margin, is lower than what the average businesses are paying.

In the northern region, the top 20 per cent of businesses:  

  • Have direct costs (including allocation of labour) of about 55 per cent of income, compared to 65 per cent for the average business.
  • Generate 10 to 40 per cent greater yield through improved crop sequencing, agronomy and water use efficiency.
  • Generate gross margins of $350 to $400/ha compared with $200 to $250/ha.
  • Have an overhead cost ratio (overheads divided by income) of about seven per cent rather than 10 per cent.
  • Spread frost risk by using a variety of crops with different planting and maturity windows.
  • Manage risk by improving the timeliness of spraying, planting and harvesting.
In the western region, the top 20 per cent of businesses:  
  • Generate 15 to 35 per cent more income per hectare through increased crop yield and cropping intensity in most zones.
  • Invest about 50 per cent of farm income into variable costs rather than 60 per cent for the average business.
  • Have more efficient utilisation of machinery and labour. In fact, the western region is the most efficient nationally when it comes to machinery and labour utilisation.
  • Invest nearly 24 per cent of business turnover into machinery and labour costs rather than 28 per cent by the average business.
  • Generate approximately $1.1 million in turnover per full-time equivalent rather than $960,000.

More information:

Simon Vogt,


All eyes on grain quality and prices


Sensor network builds soil moisture knowledge bank

GRDC Project Code RDP00013

Region South