Chances exist to grow profits

By Country News

A new study by the Grains Research and Development Corporation has identified the key profit drivers in a successful cropping business.

The project The Integration of Technical Data and Profit Drivers for More Informed Decisions, led by Rural Directions Pty Ltd, involved collecting a minimum of three years’ worth of benchmarking data from more than 300 cropping businesses across the country.

Rural Directions’ Tony Craddock said a large gap in financial performance existed between the top 20 per cent of businesses and average businesses.

‘‘It demonstrated that there is abundant opportunity for many grain growers to increase profit from the resources that they currently have available to them,’’ Mr Craddock said.

The study found that four primary profit drivers — gross margin optimisation, low cost business model, people and management, and risk management — separated the top 20 per cent of grain businesses that are consistently retaining 30 per cent of turnover as net profit, from average businesses in Victoria, South Australia and Tasmania.

In terms of gross margin optimisation, Mr Craddock said this was driven by two main factors: income (or turnover) per hectare; and variable costs per hectare.

‘‘Therefore, it is all about optimising yield in a cost-effective manner,’’ he said.

‘‘The top 20 per cent are often generating 10 per cent more crop yield per hectare from a common or lower overall investment into variable costs per hectare. This enables the top 20 per cent businesses to generate gross margins which are 15 per cent to 20 per cent stronger than the average business.

‘‘Differences in machinery utilisation and labour utilisation are driving the most significant variation between the top 20 per cent businesses and average businesses in relation to this profit driver.’’

He said a qualitative survey identified that an implementation gap rather than a knowledge gap was driving substantial differences in people and management performance between the two groups.

‘‘As a result of focusing their energy on things within their control, the top 20 per cent of growers achieve a stronger return on investment from the time and energy they contribute to their businesses,’’ Mr Craddock said.

The top 20 per cent businesses also ran low risk, high margin operations, with well-implemented risk management tools within a business including lower income variation from year to year; lower long-term cost of production by commodity; lower variability in profit from year to year; and a greater ability to withstand a business or production shock.

‘‘Businesses able to retain a greater percentage of turnover as net profit on a long-term basis become more resilient by design. They are able to more easily absorb a short-term production or business shock.

‘‘While it takes skill, courage and discipline to replicate top 20 per cent performance, it is generally decisions and choices that are well within our control that we can influence to achieve it,’’ Mr Craddock said.