The profit driver framework

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Growers who create robust levels of return and profitability ultimately also create more resilient businesses

Select enterprises that suit best land use and highest return in a region.

PHOTO: Vanessa Size

Key points

  • Retaining 30 per cent of turnover is a robust stretch target
  • Top 20 per cent performance is generally highly repeatable
  • The integration of the four primary profit drivers is crucial in obtaining strong results
  • There is abundant opportunity for most growers to extract higher levels of profitability from their existing resource base
  • Top 20 per cent businesses generally have less income variation from year to year and much lower long-term costs of production
Map showing the major grain-growing agro-ecological zones

The major grain-growing agro-ecological zones in Australia

SOURCE: GRDC

The GRDC project ‘The integration of technical data and profit drivers for more informed decisions’ highlights that there is a significant gap in financial performance between the top 20 per cent of growers and the average nationally.

The top 20 per cent are selected by return on equity (ROE) in the southern region and return on assets managed (ROAM) in the northern region. A consistent message is that the top 20 per cent generate between one-and-a-half and three times greater return than the average.

Even in areas of high land prices (which often constrain returns), strong levels of profitability are still achievable. Top 20 per cent growers also retain 25 to 30 per cent of turnover as net profit before tax, compared to about 10 per cent nationally for the average.

This is regardless of geographic location.

Creating such robust levels of return and profitability translates into creating businesses that are more resilient. They naturally develop a lower risk profile and a lower cost of production.

As a result, top 20 per cent growers can maintain profitability in average conditions at just decile two pricing, compared to decile five for the average. This debunks the long-held view that agriculture is low margin for effort and inherently risky. Instead, high-margin, low-risk agriculture is being achieved.

Dispelling resource and scale myths

A key finding to empower growers nationally is that replicating top 20 per cent performance is possible. There is little difference in resource base, with soil type, environmental factors, rainfall and farm size often very similar between growers. Yet in their respective regions, very different levels of profitability are being achieved.

The relationship between enterprise scale and performance is very weak, meaning that bigger is not necessarily better. Scale can be helpful, but only when managed efficiently. It is not uncommon to see smaller farms in the top 20 per cent and larger farms that are not.

Becoming a top 20 per cent performer

A range of important profit drivers influence farm performance; four are critical. The primary profit drivers that lead to differences in long-term financial performance are:

  • gross margin optimisation;
  • developing a low-cost business model;
  • people and management; and
  • risk management.

The interaction of the four primary profit drivers is crucial to achieving strong results. There are many instances where growers generate high gross margins but the overall financial outcome is compromised by high overhead costs.

Sometimes the potential from the existing resource base is not realised, and high levels of income are forgone. Undisciplined variable cost management also compromises profitability. Decisions and choices within growers’ control ultimately make a difference.

Graphic showing total cost as a percentage of profit for the southern region (average versus top 20%)

Total cost as a percentage of profit for the southern region: average versus top 20%


SOURCE: Rural Directions Pty Ltd

Gross margin optimisation

Gross margin optimisation is a key profit driver in grain businesses across Australia. It requires the generation of as much revenue per hectare as possible, in a cost-effective manner.

Growers achieve this by selecting enterprises that suit best land use and highest return in a region.Excellent timeliness and crop agronomy, and matching chemical and fertiliser inputs to seasonal conditions in a disciplined way, also contribute.In the northern region, soil moisture storage efficiency, which impacts on frequency and sequence of crop types, is a major contributor to optimising gross margins.

Gross margin optimisation does not necessarily mean including the highest-priced commodities. Rather, it is what creates the best gross margin given the capabilities and environmental characteristics of the property.Key management factors that drive gross margin optimisation are:

  • creating a robust rotation through careful enterprise selection;
  • a year-round focus on operational timeliness, including summer and in-season spray applications, optimum sowing date and time of harvest;
  • excellent crop agronomy and monitoring;
  • a balanced approach to inputs, based on a realistic view of yield potential; and
  • crop sequence and frequency – in the northern region increasing frequency of summer and winter crops does not always result in the best margin given available resources.

Low-cost business model

Developing a low-cost-based business through structural efficiency provides an opportunity to increase farm profit. Top 20 per cent businesses nationally utilise their investments in machinery and labour to full potential. Top 20 per cent growers are collectively 25 per cent more efficient.

They manage more hectares with less capital invested per hectare, yet do not compromise operational timeliness.This contributes to gross margin optimisation. It is not necessarily scale that drives high machinery and labour utilisation, it is how the investment in machinery and labour is matched to the size of the business.

Accessing cost-effective lease land, and the grower’s debt position, impact on the farm’s overhead cost structure. Lack of profit is a barrier to growth. Being able to expand in a sustainable manner without compromising the low-cost business model is critical to servicing debt and maintaining farm performance.

People and management

Good management is a key profit driver and is required to optimise gross margins and develop a low-cost business model. It is an implementation gap, rather than a knowledge gap, that drives the substantial difference in performance between the top 20 per cent and their lower-performing peers. There are six key management characteristics of high-performing grain businesses. These are:

  1. having a systems focus;
  2. taking a bigger picture or ‘helicopter’ view when under pressure;
  3. internalising and taking responsibility for key decisions;
  4. focusing energy on things that can be controlled;
  5. superior implementation ability; and
  6. strong observational skills.

Fast fact

An implementation gap, rather than a knowledge gap, drives the substantial difference in performance between the top 20 per cent of growers and their peers.

Risk management

A resilient business is one that can withstand a production shock and still perform well financially. Resilient businesses optimise gross margins and have a low-cost business model. Business resilience can also be improved through proactively managing risk.

Some measures that indicate well-implemented risk management within a business include:

  • lower income variation from year to year;
  • lower long-term costs of production by commodity;
  • lower variability in profit from year to year; and
  • greater ability to withstand a business or production shock.

Businesses that have effectively identified and mitigated key production and business risks generally have less income variation from year to year and much lower long-term costs of production for all commodities they produce.

Graphic showing profit as a percentage of turnover in the southern region

Figure 1 Northern region – profit as a percentage of turnover.

SOURCE: Agripath

Figure 2 Western region – profit as a percentage of turnover.

SOURCE: Corporate Agriculture Australia

Figure 3 Southern region – profit as a percentage of turnover

SOURCE: Rural Directions Pty Ltd, Macquarie Franklin, Medirian Agriculture

GRDC Research Code RDP00013

More information:

James Hillcoat, Rural Directions Pty Ltd
0438 801 966
jhillcoat@ruraldirections.com

Jason Lynch, Macquarie Franklin
03 6427 5300
jlynch@macfrank.com.au

Paul Blackshaw, Meridian Agriculture
0427 546 643,
pblackshaw@meridian-ag.com.au

Simon Fritsch, Agripath Pty Ltd
0428 638 501
simon@agripath.com.au

Gordon Verrall, Corporate Agriculture Australia
0428 721 178
gverrall@corpag.com.au