Ground Cover Supplement : GC Supplement - Profit drivers
8 Issue 132 | Jan -- Feb 2018 | GRDC GROUNDCOVER SUPPLEMENT: PROFIT DRIVERS GROUNDCOVER COST CONTROL By Gordon Verrall KEY POINTS n Variable cost control is a key profit driver n The top 20 per cent of western region growers have a markedly higher cropping percentage. They also keep variable costs to about 50 per cent of income n Enterprise mix has a significant bearing on profit n The top 20 per cent of western region growers have almost identical effective rainfall to the average grower n There are many components to maximising farm profitability and different growers tend to have different focus areas. Some focus on maximising income while others focus strongly on cost control. In reality, the growers who perform best and most reliably focus on maximising gross margins and then minimising costs (beyond variable costs) to ensure peak profit. By definition, gross margin optimisation is achieving the best balance between income and variable costs, not being fixated on one at the expense of the other. Variable cost control requires a sound knowledge of limiting parameters, an informed and disciplined approach to inputs, a strong agronomic and financial focus and best practice operational timeliness. These factors are also the drivers of maximum economic yield. Management of all components and a strong business ethos of operational timeliness are the key. The entire management system must be well executed to achieve superior performance. FACTORS DRIVING MARGIN Most growers believe that grain yield and grain price received are the primary drivers of margin within a grain-growing Western region growers count their costs The strong performance by growers in the top 20 per cent is management driven GROSS MARGIN OPTIMISATION Optimising gross margins underpins superior performance at the net profit level. There are several key factors that contribute to gross margin optimisation. Growers should consider: n enterprise mix, including the rotation but also individual enterprise scale for both cropping and livestock; n variable cost control, matching costs to production; n informed decision-making based on data; n a sound agronomic focus; n timeliness of management functions and operations; n maximising economic grain yield; and n that marketing and management combined maximise grain price received. business. However, data suggests that control of variable costs, and timeliness and quality of operations and management actually have a greater influence. Income per hectare is a product of enterprise mix, enterprise yield and commodity price. Top 20 per cent growers generate more income -- significantly more in some zones -- per hectare than the average. These growers also generate a significantly higher income per effective hectare per millimetre of effective rainfall. This ability to generate superior income from the rainfall received is a key factor in their overall performance. The following factors contribute to this difference. Enterprise mix Top 20 per cent growers often manage a similar effective farm area, but they crop a greater portion of it. They average 92 per cent cropping versus only 81 per cent for the average grower. A higher cropping percentage improves both income and gross margin for the vast majority of growers. An increased cropping area also provides efficiencies in both labour and machinery use. Grain price received Grain price received is not fundamentally different between top 20 per cent growers and average growers, being about three per cent greater. When a price difference does occur it is generally due to improved grain quality rather than through marketing strategy. Superior grain quality generally results from timeliness of operations, with harvest strategy especially important in some zones. Grain yield For the western region as a whole, wheat yield is 200 kilograms per hectare greater for top 20 per cent growers. This equates to an additional eight per cent of yield, although this value varies markedly between zones. The Northern and Central zones show no significant difference in grain yield between top 20 per cent growers and average growers. Growers in these zones increase margins via cost control rather than yield. The Sandplain/Mallee and Eastern zones show a different trend entirely, with a 15 to 20 per cent yield advantage. Top DATA SUGGESTS THAT CONTROL OF VARIABLE COSTS, AND TIMELINESS AND QUALITY OF OPERATIONS AND MANAGEMENT ACTUALLY HAVE A GREATER INFLUENCE.
GC Supplement - More profit from crop nutrition 17
GC Supplement - Crop sequencing