Is scale a profit driver?

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Match the peak performance capacity of machinery units to operational scale for superior cost outcomes.

PHOTO: Vanessa Size

Key points

  • Enterprise mix drives business outcomes more than business scale: enterprise flexibility is the key
  • Matching machinery units to scale of operation ensures efficiencies: machinery is a significant cost and over-capitalisation erodes business margins
  • Top growers employ similar labour per managed hectare but generate a higher turnover per labour unit

It is a common perception that farm business performance is very highly correlated to farm scale. Often seen as ‘get big or get out’, scale actually has a limited relationship with farm performance. Lack of scale is not a barrier to profitability.

Across most agro-ecological zones there is a very weak correlation between enterprise scale and profitability. Return on assets managed (ROAM) determines how well a grower utilises their asset base to generate profits. Figure 1 presents data from the southern region that indicates the relationship between farm scale and ROAM is virtually non-existent.

Successful and profitable large-scale businesses have often evolved from successful, well-managed, smaller-scale businesses that were in a strong position to fund growth.

Elements of scale to consider

Getting the enterprise mix correct and maximising operational management fundamentals, such as gross and net margins, and machinery and labour utilisation, drives performance.

Enterprise mix

In the western region, enterprise mix drives business outcomes more than business scale. Higher cropping percentages were typical for top 20 per cent growers, but enterprise flexibility is the key.

These growers tend to pay less for leased land, knowing the productive and margin capacity and competing on non-price factors.

They have a markedly different enterprise focus, producing significantly higher gross margins per effective hectare, and have superior control of their variable cost structures.

More profit with existing resources

There is abundant opportunity for many growers to leverage greater levels of profitability from the resources they currently have. Consider increasing profitability by:

  • simplifying enterprise mix;
  • improved timeliness through systematised patterns of work;
  • avoiding low-margin crop choices;
  • well-considered crop sequencing;
  • block farming;
  • increasing paddock size;
  • more accountable variable cost management;
  • improved implementation; and
  • disciplined approach to machinery and labour.

Machinery and labour utilisation

Top 20 per cent growers also perform better than average in machinery and labour utilisation. Gaining scale within machinery and labour units should be the focus, rather than simply increasing area farmed.

Machinery scale

Growers who manage to balance their operational scale to match the peak performance capacity of their machinery units invariably achieve superior cost outcomes. A target for machinery unit scale for many parts of the western region should be about 4500 cropped hectares per unit (with allowance for environmental considerations).

Staffing scale

Top 20 per cent growers have a similar workforce per hectare but spread the cost of the labour force over a greater income. They have significantly higher turnover per hectare per full-time equivalent (FTE). Total turnover is vastly superior, being approximately $150,000 more per FTE than average. This represents a 15 per cent efficiency gain in labour.

Efficient labour usage relates to the way staff are managed. These growers employ longer-term staff with a higher skill level. They provide autonomy and responsibility to staff, engaging them in management planning and implementation. As a consequence, staff perform at higher levels and anecdotally make fewer errors. These growers also have lower staff turnover.

Figure 1 Correlation between farm scale and return on assets managed (ROAM)

SOURCE: Rural Directions Pty Ltd

GRDC Research Code RDP00013

More information:

Simon Vogt
Rural Directions Pty Ltd
0407 959 836

Gordon Verrall, Corporate Agriculture Australia
0428 721 178