Utilising machinery to increase profit

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Key points

  • A machinery investment to income ratio of 0.8:1 is realistic and achievable. This means that for every $0.80 invested in machinery there is $1 of income generated
  • Top 20 per cent grain producers are achieving total plant, machinery and labour cost of close to 25 per cent of income, compared to 35 to 40 per cent for the average grower. Essentially this means they are leveraging more from their investment in less machinery and labour
  • Timeliness and operational standards need not be compromised by having an efficient level of machinery investment
    n Business policies for how machinery investments are made should be created to guide your decision-making

Do more with machinery investment to influence profitability.

PHOTO: Vanessa Size

Machinery, after land, is generally the largest capital investment in a grains business. Effective and efficient utilisation of machinery is a key component of a low-overhead-cost business model, which is a primary profit driver in high-performance grains businesses.

Capital investment in machinery can have a significant influence on profitability. A machinery investment to income ratio of 0.8:1 is the target, meaning that for every $0.80 invested in machinery there is $1 in income generated. The top 20 per cent of businesses meet this target benchmark, and are often lower than the target.

In South Australia, these growers are also 25 to 35 per cent more efficient with machinery and labour utilisation, measured by total plant, machinery and labour (TPML) as a percentage of income, and have fewer dollars per hectare invested in machinery capital.

They manage 200 to 250 hectares more per full-time equivalent (FTE) and generate 30 to 50 per cent more turnover per FTE. Table 1 provides figures for two agro-ecological zones.

Table 1 Machinery and labour utilisation in two agro-ecological zones in South Australia
SA Mid North Lower Yorke EyreSA & Victorian Mallee
Top 20%AverageTop 20%Average
Machinery investment to income ratio0.660.940.800.95
Investment in machinery capital per hectare$602$882$403$514
Total plant, machinery and labour (TPML) as % of income27.26%36.37%24.2%37.8%
TPML per hectare$221$272$114$169

SOURCE: Rural Directions Pty Ltd

These businesses have a disciplined approach to machinery purchase, excellent operational efficiency and strong production levels.

Ways to improve machinery utilisation

Do more with the existing investment

Ensuring that machinery and equipment is working as efficiently as possible is a key attribute of top 20 per cent growers. Ways to achieve this include:

  • setting up your farm for high machinery utilisation. This involves larger paddock sizes, rectangular paddock shapes where possible, block farming of crop types and having wide gates and good access;
  • being organised well ahead of time to ensure that you get high levels of productivity from both your machinery and labour;
  • looking to cost-effectively increase shift length during peak periods rather than upsize;
  • completing preventive maintenance well before key operations;
  • observing and reviewing machinery logistics during peak periods, identifying bottlenecks and effectively overcoming them;
  • dedicating planning time to logistics management and how to get more from each piece of equipment;
  • ensuring that staff have a thorough understanding of how to operate and maintain the equipment they use;
  • asking the question, ‘Can I delay my next machinery upgrade and get by comfortably with existing machinery?’; and
  • seeking opportunities to cost-effectively access more land to achieve a greater level of utilisation from your machinery.

Increase the leverage from the investment

Capitalising on the efficient use of machinery is also a key attribute of a top 20 per cent grower. This means they are not just being efficient with using their equipment, they are also making good agronomic decisions to maximise the returns from their effort. They do this by:

  • leveraging the best possible level of income from the investment in machinery by having excellent timeliness, a robust crop rotation and good agronomy;
  • applying the highest and best land use for each land type on the property;
  • setting a seeding start date that allows for a 25 per cent contingency for unexpected breakdowns and weather interruptions; and
  • inducting all employees to each machinery operation with an understanding of the purpose as well as the operation of the task.

Reduce capital invested

Top 20 per cent businesses commonly view capital as a scarce resource and do not allocate more than is required to machinery and equipment. They actively look for the most cost-effective way to undertake any given task and are prepared to make the hard call on items that do not serve a clear purpose. This involves:

  • simplifying the enterprise mix and number of crop types where possible to avoid unnecessary duplication in machinery capital;
  • selling machinery that is rarely used and surplus to requirements, or can be hired as needed;
  • using the cheapest method to get the job done;
  • having a strong understanding of machinery running costs and whether contractors will provide a cheaper alternative than owning certain items; and
  • making machinery upgrades and purchases in a planned and strategic way and according to well-thought-out business policy.

Well-considered machinery replacement

When analysing the need to replace or upgrade equipment, many factors need to be considered. The analysis needs to balance expenditure against the possible use of contractors and with consideration of the annual total ownership costs of labour, fuel, repairs and other associated costs.

What is TPML

Total plant, machinery and labour (TPML) is a useful measure to gauge how well a grains business is utilising investments in machinery and labour. It reflects the amount the business is spending on ‘getting the job done’.

This includes contracting, freight, fuel, repairs and maintenance, depreciation, labour, and equipment financing costs. This benchmark also allows comparisons between businesses that employ a standard ‘own and operate’ model with those using a contractor model for their machinery and labour.

The inclusion of the above factors allows genuine comparisons and highlights where opportunities may exist to increase overall machinery and/or labour efficiencies.

Often the ability to improve timeliness of operations and to reduce repair costs or downtime drives these decisions but any well-considered purchase should add to your overall business efficiencies, not detract from them.

Remember, top 20 per cent growers do not achieve their results from owning new equipment; they achieve their position by using that equipment efficiently and maximising its usage to lower overall unit cost. They use contractors to fill short-term gaps so they do not lose timeliness, but still make their machinery work for them to generate more income from their machinery investment.

GRDC Research Code RDP00013

More information:

Simon Vogt
0407 959 836
svogt@ruraldirections.com

Gordon Verrall
0428 721 178
gverrall@corpag.com.au