Go for income, says ag number cruncher

Photo of a truck carrying a shipping container

High yields and quality premiums are keys to profitability in the current economic climate, a specialist agricultural accountant told industry representatives at the recent Grains Week gathering in Sydney.

Bernard Kennedy of BOYCE Chartered Accountants warned that the final outcome of the low Australian dollar on wheat farmers’ net incomes would be highly dependent on crop yields.

“With high yields, sales price increases as a result of a low dollar should fully absorb cost increases from higher fuel prices and crop input costs. On lower than average yields, these cost increases could have a devastating effect on profit.

“Even based on average yields, income gains from the low dollar may be wiped out by increased costs on imported crop inputs and high fuel prices,” Mr Kennedy told industry leaders at Grains Week.

Working for a specialist rural management accounting firm, which prepares benchmarking studies into dryland wheat, cotton and grazing, puts Mr Kennedy in a good position to comment on how to improve farm business.

Chase yield and quality

Speaking to Ground Cover, Mr Kennedy said: “I’m very interested in using our comparative analyses to find the keys to success in the wheat industry. I believe that great value can be obtained from studying what the top 20 per cent do differently year after year compared to the average farmer.”

After three years of study on wheat growers primarily around the Coonamble and Walgett areas in north- Analysis of small improvements on an average wheat operation western NSW, Mr Kennedy concluded that the top performers had definite characteristics that made them different from other growers.

“In my view the key focus of the top performers is on maximising yield and quality. They seek to maximise land productivity over the medium term, whilst aware of risk management issues. They also have highly productive labour and machinery at a sensible scale, and have excellent planning and organisation skills.

“But above all,” Mr Kennedy said, “they understand that doing the little things well can make an enormous difference to their overall outcomes.”

Contrary to popular belief, cost savings alone are not sufficient to boost farm incomes into the positive. In fact, Mr Kennedy said it was false economy not to spend money on doing the groundwork well.

“Watching expenses is important but income is by far the biggest difference between the top 20 per cent and the average grower.

“In the BOYCE analysis the top 20 per cent made $122 per hectare more profit per year than the average grower. Of this, $111 per ha came from higher income, while only $11 per ha came from lower expenses.

“Clearly the area to focus attention on is maximising yield and quality, not cost reductions. This is ever more important with our currently low exchange rate,” Mr Kennedy advised.

How level is my playing field?

Australian wheat farmers have their work cut out for them, as they must compete on a global stage against farmers from the US and EU who are heavily subsidised.

Despite this, Mr Kennedy is enthusiastic about the future of wheat, which in his study showed returns of 27 per cent on assets invested by the top 20 per cent of growers.

Mr Kennedy said that growers who had the characteristics of the top performers, or were able to copy them, would be well placed to take advantage of increased world demand.

Analysis of small improvements on an average wheat operation
Base ResultImproved Result
Improve profit driver bt:5%
Yield per hectare (A)2.12.205
Average value per tonne (B)$156$163.80
Total income (A x B)$327.60$361.18
Expenses$264.00$250.80
Operating profit (before interest)$63.60$110.38
Total assets used$780.00$741.00
Return on assets8.2%14.9%
Include gearing
Debt level as percentage of assets25%25%
Operating profit after interest (@9%)$46.05$93.71
Capital invested$585.00$555.75
(Total assets less debt as percentage)
Return on investment7.9%16.9%