Key messages

• Farm business profitability and cashflow is critical for financial sustainability.
• Financial position plays a critical role in risk management and succession.
• Knowing your profit and cashflow underpins good business management.
• Good farm business management is recognised as common feature of successful farm businesses.

WHAT are the top 20 per cent of grain growers in southern NSW doing that makes them more successful than their peers?

Andrew Rice

While the operational answer is complex, the short answer is they are retaining 25 per cent of their income as farm profit.

New research funded by the Grains Research and Development Corporation (GRDC) found in comparison the average farm business retained just 11 per cent of income as profit.

Industry advisers Andrew Rice from ORM and Peter Lott from Lott Rural Consulting have utilised some of the results, which assessed production and financial ‘profit drivers’ to determine the secrets of business success in the grains sector.

Mr Rice said the mathematics of profit in grain producing farm businesses was simple:

• Striving for high grain yield and grain prices leads to higher income.
• Careful control of direct enterprise costs keeps the costs matched to relative income.
• Structuring the farm business to keep general and overhead expenses at a minimum assists in producing a profit.

“Following these points will deliver the highest profits for any farm business. However, the agronomy that keeps crop income matched to direct enterprise costs is challenging,” Mr Rice said.

“But each region and farm has its own unique production environment so there are few detailed ‘recipes’ for success with agronomy that can be applied across all regions and farms to deliver consistent farm business profitability.”

But he said with input from advisers, farm managers and data management programs the research identified four broad business management ‘levers’ that can be used to achieve lift profitability:

• Gross margin optimisation
• Low cost business models
• People and management
• Risk management.

“Crop rotation is the cornerstone and being able to minimise reliance on crop protection chemicals and nitrogen fertiliser using diverse cereal – broadleaf crop rotations to manage pests, weeds and disease plus supply biological nitrogen is critical,” the researchers said.

“Other facts that were critical were keeping input costs in check with lower yields, and timeliness and effectiveness of crop inputs (like disease control and fertiliser) to maximise yield.”

Low cost models

Mr Rice also urged growers to investigate low cost business models to potentially improve access to resources, management and sources of capital for development.

“Examples of farm business models include traditional family farms (own/provide all resources management and capital), land leasing, share farming, contracting and joint ventures, ideally what you want is to match farm resources to business scale,” he said.

While it was difficult to define the impact of people and management on profitability, ‘good’ management is identified as a key feature of a successful farm business.

A survey conducted as part of this research project identified performing managers as understanding the enterprise, being able to take a ‘helicopter’ view of business decisions, being decisive, focused on factors within their control and having an ability to set targets and make plans.

Risk management

Mr Rice said success farm management also involved identifying and prioritising plans to reduce risks.

“While there are many sources of risk and it is common to feel overwhelmed, there are only a limited number that are within the direct influence/control of farm business managers such as production, technology, business and personnel. It is these risk factors that the farm business manager needs to focus on,” he said.

“In grains production, there are a range of production and technology risks that have a significant impact on an enterprise’s gross margin, through either reduced income and/or higher costs (for example drought, frost, heat shock, pest and disease outbreaks).

“These risks cannot be eliminated, but may be mitigated with management. For example, with the risk of frost — crop selection, timing of sowing and agronomic practices can help mitigate the impacts of frost in paddocks that are prone to frost.”

Tracking performance

But when it came to determining what business ‘levers’ to use to improve farm business performance and financial position growers needed to know how their operations were tracking.

“Using farm performance services, like Ag Profit®, helps growers get an objective indication of where they are, which in turn positions them to make informed decisions about how and what they need to improve.”

Source: GRDC