Keeping up with the Jones’s
Farming Ahead Article April 2014
By Brett Stevenson
How do your farm profits compare with others? Are you suffering from profit envy? Perhaps it’s time to take a look at how your business performance compares with that of other farmers’ so that you can see in which areas you could be earning more, spending less and achieving overall strong results.
Benchmarking by Yarrawonga based accountants Belmores Pty Ltd compared farm profits on a group of NSW and Victoria farms between 2007 and 2012 and found a considerable difference in Farm Operating Profit Margins (Belmores 2013 Farm Business Performance Analysis Report p.25).
The top 20% range of farms reported 25 to 41% profit margins whereas the bottom 20% range were making losses of as much as -71%. The group average profit was 4%. So how do some farmers make 40% profit margins while others make only 4%?
Profit margin is determined by the farm operating profit divided by the gross income and shows how much operational profit is achieved for every dollar of income earned. An increasing farm operating profit margin indicates a business is becoming more efficient in managing its operational costs relative to income or, is maximising income or, both. This may be because of better marketing strategies generating more income, or reduced production costs.
Reducing costs is difficult to achieve. In fact, Belmore’s research shows that farm expenses have increased from an average of $485,620 in 2007 to an average of $916,893 in 2012. This includes overheads, machinery, labour, farm inputs, interest paid on finance and land lease costs. So then, how do you maximise the income you receive for your crop through better marketing performance?
Improving Marketing Performance
Income generated is a result of the combined performance of a number of variables:
- Size of the crop (production performance)
- Price achieved (marketing performance)
- Farm area size, land type and soil quality (productive scale)
Growers generally appreciate the value that a good Agronomist can add in terms of improving production performance and many use an Accountant to assist in the management of costs. It seems, however, that only the top performing growers are accessing independent professional advice to improve their marketing performance.
As the Australian grain market continues to mature, the sophistication and availability of a range of grain marketing services continues to improve. Those that understand and utilise these services are well-positioned to make the most of the market in the years to come. Understanding the pros and cons of various options and considering which offers the best fit for your business can significantly improve your returns.
Leveraging Prices through Basis
Nobody can pick the top of the market consistently for their whole crop. You may be able to sell a bit at the highest price if you’re lucky, but you’re unlucky to strike the top price for your whole crop. The only way to achieve consistent high returns is by understanding and leveraging hedging and basis (the difference between Australian and international prices).
The chart below shows the comparison of returns achieved from hedging as opposed to selling for cash over the last five years:
As you can see selling at harvest or after harvest (dark green) produces the lowest returns. The difference compared to more sophisticated marketing is $23.74t to $50t. This can more than double the net operational profit of the farm. Referring to Belmore’s benchmarking, this could improve profit margins from the average of 4% to 25%. Taking 2012 average farm costs of $916,893 and profit margin of 4%, net profit would increase from $36,675 to $229,223, an increase of $192,548. Assuming the average farmer crops for 30 years, pays 30% in tax and compounded at 5% per annum, this is an improvement in farm wealth of $9,461,324!
How is it possible to beat the top of the market?
While hedging and trading basis is complicated and time-consuming for individual growers, grouping grain together in a managed program helps growers to access sophisticated marketing strategies which can’t be implemented by one grower individually and which achieve top performing returns.
For example, the Market Check Strategic Program returns for 2012 crop were in the top 10% of prices for the 2012/13 season. The chart below shows the performance of the Market Check Strategic program against the Average Cash Price, Top Cash Price and the Bottom Cash Price for the season (Nov 2012 – Oct 2013) shown as a percentage of price range. All values shown are net of warehousing, interest and management (in the case of Market Check returns).
Back the right horse
You don’t need to be a rocket scientist in hedging strategies, you just need to know one. Choosing your grain marketer wisely is imperative as your choice can make the difference between exceptional results and below average results.
The first step is to understand the philosophy, expertise and track record of the manager. Ensure that they have well-established systems and that their reporting is transparent easy to understand. You may also want to consider the structure of the company you are choosing. Are they independently owned and structured? You may not want to entrust your grain to a company that has a merchant division that is also seeking to purchase grain as cheaply as possible.
There are very few independent grain marketing companies left, so find a trustworthy independent with a strong track record.
So how do you achieve enviable farm profits? Growers who are successful in marketing performance are successful in generating overall farm profit margins. Accessing professional marketing advice is key to improving the marketing scorecard in your business. Just as Accountants and Agronomists are used to add value to a farm, so can a professional marketing company with professionally managed marketing products and services.