Ground Cover Supplement : GC Supplement - Profit drivers
15 Issue 132 | Jan -- Feb 2018 | GRDC GROUNDCOVER SUPPLEMENT: PROFIT DRIVERS GROUNDCOVER BUSINESS RESILIENCE WHAT ARE PRODUCTION AND BUSINESS RISKS? PRODUCTION RISKS TO CONSIDER INCLUDE: n Frost risk n Dry or failed springs n Late breaks n Enterprise conflict that creates compromise or complexity n Waterlogging (in some parts of the zone) n Herbicide-resistant ryegrass n Crop disease n Heat shock during grain fill n Lodging and head loss BUSINESS RISKS TO CONSIDER INCLUDE: n Catastrophic events (fire, flood, hail) n Debt serviceability n Price risk n Workplace health and safety n Key person risk n Wills, succession, asset protection n Human resources (employee turnover is a risk that requires management) PROFIT DRIVERS The interaction of the four primary profit drivers in high-performing grain businesses is essential to adding margin and reducing risk. These primary profit drivers are: 1. Gross margin optimisation. 2. Developing a low-cost business model. 3. People and management. 4. Risk management. If one of these primary profit drivers is overlooked, it will compromise profit potential and long-term financial performance. Part of managing risk is knowing the cost of production for each enterprise. PHOTO: VANESSA SIZE TABLE 1 Cost of production, return on equity and profit for top 20 per cent and average growers in the southern region. SA Mid North Lower Yorke Eyre SA & Vic Mallee Top 20% Average Top 20% Average Average cost of production for wheat ($/tonne) $178 $209 $152 $220 Return on equity 8.04% 3.22% 12.98% 4.68% Profit as % of income 24.12% 11.59% 26.94% 10.22% SOURCE: RURAL DIRECTIONS PTY LTD This approach also removes emotion and means decisions, particularly related to grain marketing, can be made in a rational and balanced way. Margins can then be added or altered to reflect production and market risk. The principle should be: the higher the production and market risk, the higher the margin. ACHIEVING HIGH MARGIN, LOW RISK AGRICULTURE An important insight is to understand that whenever profit margin is added to a commodity business, the overall risk profile of that business will drop. Gross margin optimisation and striving for a low- cost business model are the two available levers to add profit margin within a grain business. It is also important to note that top 20 per cent and average businesses farm very similar resource bases. o GRDC Research Code RDP00013 More information: James Hillcoat, Rural Directions Pty Ltd, 0438 801 966, email@example.com Useful resources GRDC 'Strategic Risk Management' Fact Sheet, www.grdc.com.au/GRDC-FS-StrategicRisk; GroundCoverTM Supplement 'Grain & Graze', November--December 2014, https://grdc.com. au/resources-and-publications/groundcover/ ground-cover-supplements/gcs113 that the average businesses are less able to capitalise on good years and are less resilient in poorer years. The bell curve for the average business (green) is also positioned to the left in comparison to the top 20 per cent business. This means a top 20 per cent business is much more capable of harnessing upside or managing potential risk, while an average business is considered to be more exposed to downside risk. COST OF PRODUCTION AND MARGIN Knowing cost of production is essential to managing risk. Knowing how much it costs to produce grain in dollars per tonne is very beneficial for establishing business rules that guide management strategy. Cost of production can be worked out based on drought yields, average yields and above-average yields. Using cost of production as an underpinning farm management principle will assist with setting up your business as low risk, high margin.
GC Supplement - More profit from crop nutrition 17
GC Supplement - Crop sequencing