Farm Business Scale – is it a profit driver? – Simon Fritsch

Farm Business Scale – is it a profit driver? – Simon Fritsch


so what one of the key messages
first and foremost one of the key messages is that our long-term benchmarking data over 10 or 15 years for most of the regions that we
deal with consistently show that there is no real correlation between farm scale farm profitability that’s good news if you’re sitting in
the audience at the moment thinking are Im only a small operation how can I
compete with the big boys look at lookat some of that data I want to reiterate the profit particularly from a grain farming business is driven by yield but also enterprise choice gross margin and having a low
business overhead and these are directly influenced by how you guys manage you
have an impact on each of those items the decisions that you make on a day to day basis will impact on your profitability and look at some of that data making
good decisions about machinery can reduce your costs by up to a hundred
dollars a hectare we’ll have a look at some of that data and understanding these interactions mean that your business can find a sweet spot a level
of profit that can run at a good profits and enable you as individual growers to
do the things that you need to do with your family to provide the wealth for
your business to provide succession to provide the wealth to school
kids provide the wealth to buy the neighbours provide the world to do the
overseas trips and provide the wealth to build the kitchen and the house
extensions and I sorts of things so it’s really about understanding your business profitability and how we work with that to our to build that wealth databases from a great path this is a bit of a heat map of where we are located and how we work with our growers we really base lot of the data I’m going to
show you today ar e based on regional groups which extend from in the Queensland right through the high rainfall region of just out of Geelong in the in the high rainfall region there and it’s really from a perspective about trying to
understand what drives profit in each of those sort of geographic areas so that
we’re getting away from the issues of it didn’t rain on my place and it did on that one in the north of the state so the probabilities different we’re really starting to look at business profitability over a long
period of time in civic regions over that period of time I want to start
first of all is that when we talk about sweet spot we’re really talking about profit where
is it that your farm is generating good performing return on its
assets in in that environment and the way that we measure that or I call the
engine that measures that is the operating return on profit and it’s
basically calculated by taking the grose income of the business that it generates
and from that we deduct those costs we call direct costs which are the costs that you incur to generate that income so in the farming business that’s things like say kaempfert but it’s also your life over the machinery
costs it that you put into that into growing that crop cartidge those
sorts of things are also important cost in terms of generating income we also
then deduct what we call the overhead costs of the business and the other
costs that you incur that don’t generate you any income so from a business
perspective we go out farming in the central west region of New South Wales
we all have a certain level of fixed costs in their business that we incurred
regardless of what we do will choose to do on that on that asset so with things
like rights insurance R & M on the ute and the family car to get to
town a bit of your own time to manage the business bank fees, accountancy
fees all these things are what we call the overhead costs of the business and I
have a big bearing on the profitability that equals the operating return and
from a profit point of view when we focus on that we’re looking at putting that over
the assets imagine the business so in your case that includes the livestock, land, water and the machinery associated with running the business we like to at Agropath call this the engine so underneath that is a whole
host of things which some of the previous speakers have already talked to
about including my colleagues a Sam Newsome there are things like the interested in your business occurs the drawings that your business occur the maintenance of the CAPEX on your assets at your business incurs in the text your business pays they are what we call discretionary items and they become below the line so when we’re trying to look at fine performance we’re really
looking at your business to say how well is that engine performing how well is that engine creating significant enough profit to cover the drawings
attacks the loan repayments the interest that the businesses incurring
so from a benchmarking point of view we generally focus at this level to enable us to understand the concept of what is it about those top performing
businesses or their engines how well are they performing and what does that mean and part of what we do at a Agripath
is really help you as growers put your information into a format so you can
therefore make better decisions about your engine about how well and engines
needs to perform to achieve the things that you want to do such as school kids
and I sorts of things in your business but more importantly what are the things
that can directly influences managers that will improve my profitability for
my business going forward out of that period of time so my focus now going forward is really about not the things that we want our engine to do for us but
that engine itself in terms of what makes a good engine what do we need to focus on as farmers
what are the things that drive that outcome to give us higher profitability out of our
businesses going forward so the first thing I want to look at is is this
issue of scale this is some benchmarking data from northwest New South Wales it could be a central west data set this is long-term return on assets managed so each one of these dots represents a farm in the data set and it’s looking at their average return on assets over a five-year
rolling average in other words these farms this farm here is achieved over
the last five years return on assets of about ten and a half percent on its
asset base this farm over here is returned a return of the best five point
eight percent return on assets managed so we’ve got return on assets managed as
I said operating profit of the asset measured the percentage in other words the farm here thats got 10 million dollars worth of assets achieving ten percent return is achieving our million dollars worth of profitability every year over five years and have over five years on average sometimes the profit will be higher sometimes the profit will be lower our but I over that five-year rolling average it’s achieving about a million dollars worth of
profitability over that period of time what we can see from that data point is
when we look at each of these farms and compare that with the area cropped
including fellow because we’re in the North that profitability varies greatly amongst the farms including on scale in fact some of the larger scale
businesses above 10,000 hectares have actually had some lower performances and
some of the smaller businesses and I think that’s good news is an operator
for everybody in the data set because it means that everybody’s got opportunity
from our perspective some of the issues here is to say well you would think scale
would be benefiting farm performance and the prophet of the business and I think
it comes back to this question that as a business grows so does its overhead cost
structure and probably more importantly so does its ability to control over how it can manage things and do things on time starts to wane a
little bit as a locus of control gets larger and larger so we tend to say a
drop-off in profitability that said when you look at long-term returns on assets
compared to anything that brand five and six percent is a pretty fair
mark and as Mark said before in terms of add that to your capital gain over six
percent you’ve got businesses that are still performing at over 12-percent
return including capital gain and over the last five years which I think beats
anything in terms of the equity market the encouraging thing here is for
businesses that have got small scale we have a large range of profitability
varying from as low 2% right through to over 10% for various similar scaled
businesses over that period of time and from our perspective that starts to make
us wonder well what is it that some of these businesses doing compared to their
peers that drives that extra profitability that allows them to
operate their engine at a level that’s generating ten percent return compared to some of these other
businesses of a down round two and three percent returns on asset, when you think
about the average asset in that group being about 20 million dollars a return
of ten percent compared to return a 2%- 8% percent is a 1.6 million dollars difference in profitability between a farm performing
a two percent and one farming at about ten percent in that environment so one of my
key messages either doesn’t matter whether we gather Northwest to the
central west so the southern high rainfall zones what we see when we
start looking at farm performances is that large variations in profitability
and yet when we talked to those growers and I look across the fence they say I
don’t understand why that is happening i think i’m growing the same sort of crops
and i’m getting the same sorts of prices as my peers why they’re big differences in
profitability and the answer lot of its to do with management and the ability of people to get performance out of their assets so how
do we find a sweet spot so the challenge for us is to take business sitting in
here and if we think about average farm business at 4,000 hectares in in the
dataset we’ve got quite a large range of variance around that sort of level for
farming up rails ten percent and as long as two percent returns for businesses in
that environment so how do we take a business that isn’t performing well to a
more profitable type of business my first messages that you need to focus on
margin margin is probably the most important component of helping
generate high returns for a business this chart looks at the central west
again its long-term data so it’s from our central west clients encompassing the
Warren Knable region in this environment and it just looks at return on assets
managed again up the left-hand side here ranging from 0 through 8% and along the bottom here is what we call the long-term crop gross
margin so this is a gross margin that is generated year-on-year the average gross
margin during that generated year-on-year from all the crops grown
including the fallow so we take the entire farming area and divide it by the
total crop gross margin to give us this average long-term gross margin so
includes the gross margins from the wheat that you might have grown it includes the gross margin from
the canola or the chickpeas or lupins that you might have grown and it’s looking at how that lines up in correlation in terms of return on assets managed and we can see that what we’re see is the top-performing farms in that part of the
world a generating margins in excess of 250 dollars a hectare compared to these
guys then he generating 1 & 2 % returns with margins of around one hundred dollars per hectare if you take the average farm that’s Sam put up earlier in the morning and talk about 2,700 hectares of farming the difference
between what these guys are achieving and these guys achieving at about an
extra hundred and fifty dollars a hectare on 4,000 hectares of farming is about six hundred thousand dollars a year extra profit as a result of that performance compared to their peers it’s a lot of money individually for
people what does that mean in terms of
performance what’s driving that outcome one of the main things and one of the
one of the keys is a focus on yield and when we look at just gross margins in
the northwest for short fallow wheat in 14 -15 the top-performing farms
generated margins above five and six hundred dollars for their wheat crop at yields above two and a half ton to the hectare as the yield drops away so does the margin in that environment as key focus for growers going forward is that you do need to be focused on yield yield is a
major determinant of driving profitability in your business but it’s
a little bit more than that because profit is about income less the costs the we have seen and that income is not only driven by yield but it’s driven by the
price that you achieve in your business for commodities it’s driven by the scale
and the arability of your business so how much of your country is devoted
to farming how much is devoted to livestock and what the appropriate mix
for that might be given the environment and the relative profitability of it and
more importantly from a farming perspective it’s also driven about enterprise choice and this thing called cropping intensity what level of intensity do we drive business performance in in your environment the other component of the profit is the cost so we had things like area yield and TPML costs your plant machinery and labor costs
that your business incurs ill talk a little bit more about them a little bit
later in my talk and the farm overhead costs and the need to keep the cost down and in that environment when we think about yield, yield is a function of plant available water and water use efficiency and one of the
things i think that the top-performing farms do is I understand their
environment they understand the environment that they working in and
what impact that has on their ability to produce yield and profit out of their
businesses going forward alright when we talk about plan
available water we’re really talking about growing season rainfall which we
all know I right at the moment we’ve got plenty of probably more than we wanted
but we’re also talking about this issue of stored soil water and particularly
for farms north of Dubbo stored soil water becomes a very important component of the profit factor going forward that’s influenced by how well we do some of these things how much we will retain how good our weed control and and how timely what sort of tillage systems we maintain
their system all impact on that starting soil moisture as we know but we don’t think about enough and what I encourage growers to think about is what environment
are we actually operating in so we take an environment like Coonamble or Warren
this environment what we do know is that when we run a
hundred years worth of rainfall data we get about 277 millimeters between october
and april and if we’re good farmers and we store that moisture at 27.5% water use efficiency or fallow efficiency in that environment that
means when we plant the next crop we have approx 84 millimeters on
average in that profile yet we’re working on profiles that hold a 150 to 210 millimeters of moisture in those environments and what I do know is that the top-performing farms that have resilient businesses engines are performed well understand
that really well about their environment what it means when we have 84
millimeters of starting moisture is that in as average it means fifty percent of
the time we have less than that. fifty percent of the time we have starting
moisture in air cropping systems with less than 84 millimeters and
fifty percent of the time we have greater 84 millimeters and it’s what you
do with that in terms of how to fix your farm profitability that is one of the
big differences between what top farmers are doing and what average farms are
doing that environment what does this mean? well if we looked at
that same data and work on a plan available water for wheat on short fallows and chickpaes on short fallows on every sort of rainfall it means that
the plan available water when we include the 84 mils of starting moisture plus in crop rainfall in that environment is about 270 mills environment when we look at standard water use efficiency work and which we
validated with benchmarking and the closing yield get project we’re really
talking about achieving an average attainable yield long-term in that
environment of 2.4 ton of the hectare for chickpeas about 1.4 ton of the hectare if we use what we call long-term wheat prices and long-term chickpea prices we’re regenerating those sorts of incomes and we’re incurring the sort of direct costs
to give us that sort of margin over that environment then if we deduct the overhead
costs for those two crops we’re achieving these sort of return $145
per hectare for wheat on short fallow in the following chick pea crop at a $198 giving us a return of about $345 if we choose just to longfellow in other words store the moisture from that weight crop and
and grow it in that crop in that same environment we actually can produce a
very similar profit $339 a hectare from only farmed once every two years but
probably more importantly we’re only spending $375 instead of $655 to get the sign profit in their business does everyone understand that concept
so Mark talked about risk”, before and how we do de-risk a business it’s about understanding the
environment that you are in and changing the language from guess what that
happened is she cause it didn’t rain to, we do these things in this environment
because we know one year and five it’s not going to rain enough we know that 2 years in five our starting moisture is going to be less than 84 millimeters
and we do these things specifically in our environment because of that fact. The
further east we go we have a different conversation we say we do these things in our environment because of these reasons because we accumulate moisture we don’t have the profiles in our soils to store that moisture and we do
these things as a result of that in our environment to enable that to happen as
part of their risk profile so it’s about changing that conversation from this is
what we got because of it this is what we do because we know this
about our environment and I think that’s what good performing farmers do very
very well how else we find your sweet spot one of the important things is that
we need to recognize that some crops and more profitable than others and we need
to be measuring our performance individually and as peers to understand
that over time so we can learn about which crops more proper and some crops add a lot more value to your cropping sequences than others so
some crops like cereals on cereals take away from the cropping sequence
performances where crops like lupins and favor beans and chickpeas can add a lot
of agronomic benefit to your cropping sequences going forward and getting on
this issue about what we call crop frequency in terms of particularly where
you are further west in lower rainfall environments with big profiles we really
need to answer that question about what is appropriate cropping frequency from
our environment how much fallow i have in my farming system and I do these
because it’s more profitable for me to do that ever have a period of time the
other component of these that we really need to be thinking about low cost
businesses what is it how can we keep their costs
low in the business and look at my head cost data and shortly and if you ask
more scale i believe one of the big challenges for you is to find ways to leverage your time unfortunately you have time growers with five six thousand
hectares plus are probably full-time managers farmers with listen two
thousand need to start thinking about how they can leverage their time or the
sun’s time or the next generations time going forward so that might mean that you will run the business of farming but you also
do other things i’ve had clients that worked on oil rigs to get into farming
they’ve gone and done there two weeks on and two weeks off and run a farm while
they’re doing it I’ve had others that have worked on the live sheep trade into
sortie just into the Gulf managing being the livestock manager on
that sort of business just to get leverage on their time so they can apply
it so small farms one of the key issues for you guys is how do I leverage my time
is it through contracting is it through doing things our farm how do i leverage more time to get that
that’s sweet spot in my business so what is the importance of crop choice this is the long-term five-year
average gross margins for wheat, barley, chickpeas, lupin, canola and the average
crop gross margin for farms in the central west region over the last five
years rolling average in that environment the blue is the average what the average growers have achieved and the orange is what the top-performing farms over a five year period what they have grown and acheived we can see that their focus has been
primarily wheat and chickpeas and as a cereal and I have been the two most
profitable crops, again so if you start thinking about the difference between
farm performance on a crop like lupins or canola in that environment
compared to chickpeas you’re giving up to $100 a hectare if the land is suitable for growing chick peas in that environment
compared to some other crops in that environment on a couple thousand hectares thats two hundred thousand dollars worth of probability between the difference in
crop choice so crop choice becomes a really important component so when we’re
looking at the fence saying why is that some farms perform better than the
others some of its due to yield some of its due to
the types of crops in the sequences they actually using their
businesses going forward when we talk about overhead costs are running like
cost businesses this is the central west five year
long term again average overhead costs per hectare for businesses versus their scale across the bottom ranging from zero to ten thousand hectares and again we
can see that for the businesses that have got similar scale we’ve got large
differences in overhead costs so we’ve got businesses sitting here running at
about at about $140 , $160 , $170 per hectare and equivalent
businesses running at about $60, $70 per hectare on average farm
that Sam put up this morning that $100 per hectare is about
three four hundred thousand dollars extra profitability that some of these
businesses are enjoying over some of the peers in that environment you can see
there that the overhead costs do drop as the scale of the business business
increases but i really want you to focus here at this level that it is
possible for small-scale businesses to have a low overhead cost business so
again these are things about how you use use your time how are you how you make decisions about
insurance how you make decisions about your vehicles and those sorts
of things on your farm how you make decisions on RM on those vehicles and
things over time can reduce the cost of your business going forward over that
environment so quite dramatic differences in profitability achieved by
those farms so again when we look over the fence was saying why is it some farms
perform better than others part of it is that they run a very low
overhead cost business compared to their peers total plant machinery and labour from a Agropath perspective the challenges always been about machinery how much kit do I have Im going to stand in this camp over here and say I love heaps of kit I just want to get the job done I want to stand over in this camp and
say I don’t like lots of kit I think it’s expensive, it deppreciates I
want to do it as cheaply as possible what is the right argument in terms of machinery in terms of how we use it we meet that challenge by looking at what we call total plant machinery and labor
costs so it’s essentially the addition of all the contracting cost that your
business incurs in it contract spraying contract harvesting contract planning if you do it plus all the costs associated with running or owning machinery if we run and own machinery we’re
incurring R&M we are incurring wages for people who operate that
machinery and we’re incurring depreciation on that machinery the
fact is we are by machinery and watch it lose value or buy machinery and watch the price of new machinery go up much higher than what we bought our last bit for either way it’s depreciation that we are incurring over that business and when we start lining up those total costs to do the operations to get a crop of wheat in the ground this data here just looks at short fallow wheat TPML costs total plant machinery costs across a
data set of farms and it just shows that for some farms it’s costing as low as a
hundred dollars a hectare and for some farms that costing over two hundred
dollars a hectare so again we take the example farm that we have in front of us
in your books at 3,700 heactares a hundred-dollar a hectare is $370,000 difference between that sort of farm and
what these farms are achieving just through the decisions that I’ve made from
machinery and I know this is a very confusing chart but if you look at this farm over here its chosen to do everything by ownership
so its own setter owns its own planter owns its own sprayers, costing $140 per hecatre and we got another farm sitting in the middle here which is this one here which is chosen to do it
all by contract very similar cost so we got farms that are fully contract with
very little labor input from the owners compared to other farms are choosing to do everything themselves with very similar TPML cost and the
variance across that data set is over $100 per hectare so as growers we need to say well what is
the cost and what is right for us going forward when we look at that in terms of
scale does owning lots of machinery help us in terms of scale will the answer
for that he’s probably yes if we have small scale than
the cost of machinery ownership it kind of makes sense that it’s going to be a
little bit more expensive and it gets a bit out of hand this is Western Plains TPML wheat costs with cost getting really high in this case it was a year in 2014-15 where some people didn’t plant a lot of them their area because of fallow
but we’ve got large variance in cost it’s equally important if we focus down
here that despite scale we can have businesses even with small-scale again
that are achieving TPML costs of very competitive with their larger scale
peers, so as a challenge we need to understand what TPML costs are for your business going forward I would advocate the only way you
can do that is actually by measuring your TPMLcosts through something like benchmarking so you get an understanding of that remembering that there is up to $100 per hectare better performance by getting it right why does this occur because i think when we think about efficiencies we generally think in terms of machinery our ownership as the
scale of the business rises we generally believed that so does the efficiency of
machinery use but it’s actually not the case it’s actually a little bit of a
rollercoaster component and it really looks like this this is a one-man show
running the right amount of gear with the right amount of area to plant that crop and get everything done on it but if they choose not to plant as much
which is what we saw in the prior slide these guys because of dryness then their
efficiencies get really inefficient really quickly and equal if they choose
to plant more with that plant then they start to run into other issues in terms
of planning time and their efficiencies drop off pretty quickly a
two-man show would probably got a little bit wider before we drop off an
efficiency and then we can go to a big Paris green tree model where we can
probably take on another couple thousand and it’s not going impact on our efficiencies but the relevance here is it is possible
to be an inefficient farm with high scale through the choices that you’ve
made and when we look at that TPML costs across farms look at the scales we’ve got differences between some farms and others as a result of it
just one issue to talk about in timeliness in terms of its impact and a lot of
people talk to me about this and say well that’s all right now I’m gonna have a
hard time female cost I don’t care because I get things done
on time and to some extent i agree with you so if your business is a business
that has a high TPML costs but it has high gross margin and the engine has
high probability that allows you to do the things that needs to do then that’s
great and i would support you on that if your business is a business that has a high TPML cost and low margin and loud profit then it’s probably something you should look at going forward in terms of what is appropriate for our business is there a better way to do that what we do know is that as businesses move from scale is what we did yesterday or last year
doesn’t always work going forward often if we buy a block it might mean
that we need to use contractors instead of kitting up
because we’re going to end up in one of these little holes as a result of it going forward which will affect business profitability that said the importance of timeliness this is some work done by Graham in 2014 on start time of sewing with 26th April through the 5th July for both Gregory and Suntop at Narrabri, yields dropping from 5.5 ton to 3 ton time so I quite dramatic Loss in yield we lookat that in terms of profitability if we
had a full profile moisture in that environment we’re really looking at a
difference in the mid May plant to a late June plant of over $500 dollars a hectare in margin as a result of that yield difference if we’ve got low starting moisture we’re still looking at a difference of over $200 a hectare in margin as a result of that outcome so when we’re talking about
machinery issues and the lessons associated with it we need to ensure
that whatever decisions we make they need to be timely ones in other
words getting things done on time I want to finish the sweet spot difficult to
find but it’s really about focusing on
margin if you focus on margin and the things that drive it then it’s possible for every business despite its scale and its size to have a sweet spot be very
profitable and achieve profitabilities that allow you to do the things that you
want to do pay the school fees do the holidays by the farm next door pay the debt back provide succession for the next generation if you focus on margins and things that drive it you can achieve it you need to know your numbers and be very adaptable in terms of particularly with machinery and crop
choice and understanding that impact of starting moisture on your profitabilities
and the decisions that you make around it and I’d encourage you if you’re
interested I want to be challenged about trying to find your sweet spot or
building a more profitable business talk to us about a farm focus crisis process
and get involved in benchmarking because if you don’t measure it it’s very difficult to have a
conversation about some of these things thank you!

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