THE idea that graingrowers need to get bigger to ensure profitability is one of the biggest myths in agriculture, according to Rural Directions agribusiness consultant James Hillcoat.
Mr Hillcoat ran a forum on profitability at Bute recently and he said scale alone was not an effective profit driver.
“The relationship between scale and financial performance is quite weak,” he said.
“There’s a lot of smaller businesses that rank in the top 20 per cent for profitability, because they do what they do well. People say they need to get bigger to remain viable, but that’s not always the case.”
Mr Hillcoat said a good example of scale not leading to profitability was the failed Masters chain of hardware stores, which started with a large amount of stores, but failed to recognise Bunnings had a tight-grip on that market because it had the basics right.
“Masters is good example of scale not leading to profitability whereas On The Run is an example of a successful business that is profitable because they do what they do well,” he said.
“OTR started out as a small family business, selling fuel, with a bit of retail. They had good profitability from that, so then they started the next business, and then the next one, and grew from there.
“You can run into serious problems with businesses when they grow too quickly.”
Rural Directions was part of a GRDC-funded project called The integration of technical data and profit drivers for more informed decisions. The company was also part of a similar study funded by Meat & Livestock Australia that focused on the livestock industry.
But Mr Hillcoat said both projects produced similar results, with similarities between profitable farmers whether they were croppers or graziers.
With the GRDC-project the top 20pc of farmers were selected by their return on investment.
“That way we could see how hard their money was working,” Mr Hillcoat said.
“What the top 20pc were saying was very consistent.”
Through the project, four primary profit drivers were identified: gross margin optimisation, having a low cost business model, managing people effectively and having good risk management.
Mr Hillcoat said two big factors driving the differences between profitable farmers and those less so were agronomy and timeliness.
“An important thing to look at is whether you are utilising the best varieties you can for your environment and what your rotation looks like,” he said.
“Another important thing to look at is your fertiliser and chemical costs and whether you’re being selective about what your paddock needs.”
