What the top farmers say about their substantial profits
Graeme McConnell, Planfarm Pty Ltd, Northam
Email: graeme@planfarm.com.au
Chris Carter, Department of Agriculture and Food, Western Australia
Email: chris.carter@agric.wa.gov.au
Peter White, Department of Agriculture and Food, Western Australia
Email: peter.white@agric.wa.gov.au
Key Messages


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The top farming businesses are generating 174% of the operating surplus of
the average farming business.
The difference in profitability between the top farmers and the average
farmers is not due to external factors such as rainfall or soil type.
The top farmers have an uncompromising commitment to focussing on what
drives profit, being highly prepared, making major decisions outside of high
stress periods, attention to detail and being positive about the future.
Aims
Department of Agriculture and Food, Western Australia’s (DAWFA’s) Bridging the Yield
Gap Project (BYG) has a goal to increase the profitability of grain production in the high
rainfall regions of Western Australia (WA). The goal is based on analysis that shows a
gap between the realised average yield and the potential water limited yield.
BYG commissioned Planfarm Pty Ltd (Planfarm) to compile a report based on the
analysis of financial details and face to face interviews with their top 26 farmers in the
high and medium high rainfall zones. The report illustrates the difference in profitability
and production of a group of top farmers compared with the average farmers group. It
presents some characteristics of how the top farmers manage their business and farm,
based on farm financial data and responses to interview questions. The report fills a vital
role in understanding what is possible for WA farmers.
This paper presents a part of the data and some key findings from the full report.
Method
Planfarm analysed the farm businesses of clients based in the high and medium high
rainfall zones. Clients were ranked based on the profitability of their farm business for six
years (2005 to 2010) over two (partially overlapping) six year data sets. The 26 farmers
who were the most profitable during the period were then selected for interview. To
qualify farm businesses needed:
1. Minimum long term data of at least 4 years and
2. Farm located in the medium or high rainfall zones of Western Australia
The financial measures used to rank clients were:
 Return on Capital (ROC) – favours lower rainfall with a lower land value
 Operating profit per hectare (ha) – favours high rainfall (ex water logging)
 Operating profit/ha/millimetre (mm) of effective rainfall – favours medium rainfall
The number of top farmers in each of the agro-ecological zones is presented in
Table 1.
Table 1 The numbers of clients interviewed from each zone
Zone
H1
H2
H3/4
M1
M2
M3
M4
Total
N of ‘Top Farmers’
1
3
4
3
5
3
7
26
Each of the three measures have a tendency to favour a particular region, yet in
conjunction, they present a fair measure of business performance. The financial and
production details of the 25 of the top farmers were compared with the average of the
other farmers on the Planfarm client list in the same regions. While the initial cohort was
26 farmers, the financial data of one farmer was removed for the analysis because it
included high intensity livestock operation and that skewed the averages for the
profitability data.
For the second part of the report, Planfarm conducted interviews with all 26 of the top
farmers to explore in more detail the factors that set these businesses apart. There were
nine interview sections (
Table 2) that focus on different elements of farm and business management. The
interview questions were prepared by Planfarm Pty Ltd, farmers and consultants on the
Bridging the Yield Gap Advisory Board and staff from DAFWA
Table 2 Interview sections
1
General
6
Technologies
2
Production
7
Marketing
3
Financial
8
Succession/ Training
4
Management and Risk
9
The Big Picture
5
Information
RESULTS: Findings from profitability and production metrics
The financial and production data of the top and average farmer groups were compared
over a range of metrics. Only the key results and analysis are presented below, other
results are included in the full report.
Operating surplus
Operating surplus of the top farmers was 174% of the operating surplus of the average
farmer group over the given period (Table 3). If the average farm were able to achieve
the same operating surplus as the top farmers the difference would amount to an
additional $226 008 operating surplus – in every year (based on 3139 effective ha – the
average farm size in 2010).
Table 3 Difference in gross income, Operating Cost and Surplus/Deficit between
top farmer group and average farmer group
Average Top
% Difference
Ave Gross Income dollars per hectare ($/ha) (05-10) 355
470
32%
Ave Op. Costs $/ha (05-10)
259
302
16%
Ave Op. Surp/Def $/ha (05-10)
96
168
74%
Equity and Return on Capital (ROC)
There was little difference between the equity levels of the top farmer group and the
average farmer group. The Return on Capital, however, was significantly higher for the
top farmers (
Table 4).
Table 4 Difference in Equity and ROC between top farmer group and average
farmer group
Average
Top
Ave Return on Capital excluding capital growth% (05-10) 1%
4%
Equity % 2010
75%
75%
When capital growth is included in the ROC calculation, the best farmers achieved a
compounded annual rate of return of almost 8%, while the average was just over 3%.
Area in crop
There are several possible explanations to the profitability of the top farmers. One such
explanation is that the top farmers cropped a higher percentage of the arable area (Table
5). Due to the relative profitability advantage that grain has had over livestock in the
years preceding 2010, this is a key driver of profitability in the selected years, however
the additional area in crop does not fully account for the difference in profitability.
Table 5 Difference in cropping percentage between top farmer group and average
farmer group
Average
Top
% Difference
% Crop 2010
66%
79%
19%
% Crop 2009
66%
78%
18%
% Crop 2008
65%
76%
17%
% Crop 2007
58%
73%
26%
% Crop 2006
51%
65%
27%
% Crop 2005
57%
69%
21%
Yields
The most significant difference between the top farmers and the average farmers was
the wheat and barley yields. There was a 22% difference in wheat yields between the top
farmer group and the average farmer group (Table 6).
Table 6 Difference in observed yield between top farmer group and average farmer
group
Average
Top
% Difference
Ave Wheat tonnes per hectare (t/ha) (05-10) 1.85 t/ha
2.26 t/ha
22%
Ave Lupins t/ha (05-10)
1.17 t/ha
1.39 t/ha
18%
Ave Barley t/ha (05-10)
1.95 t/ha
2.32 t/ha
19%
Ave Canola t/ha (05-10)
1.08 t/ha
1.10 t/ha
1%
Ave Oats t/ha (05-10)
2.07 t/ha
2.14 t/ha
3%
The difference in yield was not due to the top farmers receiving better rainfall (quantity or
seasonal distribution). Comparison of rainfall data shows that there is minor difference in
the rainfall received by the top and average farmer groups, for growing season rainfall, or
summer rain (Table 7).
Table 7 Difference in observed rainfall between top farmer group and average
farmer group
Rainfall Period
Average
Top
Difference
Ave Rainfall Jan-Apr (05-10)
72 millimitres (mm) 74 mm
3%
Ave Rainfall May-Oct (05-10)
238 mm
240 mm
1%
Ave Rainfall Nov-Dec (05-10)
24 mm
24 mm
-2%
While it is not possible to use the Planfarm data to determine whether yield differences
were due to fewer soil constraints, the interviews conducted with the top farmers
indicated that they considered the soil on their property was not significantly better than
on surrounding properties. Capital value of farms were also similar, further indicating that
land quality of the farms in the different groups was likely to be the same.
Finally, the top farmers indicated they did not adopt new, high yielding varieties rapidly
and were using similar varieties to the average farmer group. Removing the influence of
soil, rainfall and better varieties, indicates that the likely cause of the higher yields
achieved by the top farmers was technical and management efficiency of the operator.
Results: observations from interviews
The interviews were completed during the 2011/12 season. Each interview was
conducted face to face for approximately two hours. Interviews were only conducted with
the top farmer group and not with the average farmer group.
Focus on what drives profit
The top farmers tended to use sound and rational decision-making processes to analyse
whether a particular management practice was profitable, and stuck to budgets as much
as possible. These processes included cost benefit analyses, analysis of alternatives,
and need assessments. The top farmers understood the risks in making changes to their
programs and businesses. When changing farming practice or investing in technology
the farmers did not make unconsidered decisions and were likely to consult with multiple
specialists. The farmers did not consider themselves early adopters, and most took a
wait and see approach. As an example, the farmers said that they were not likely to rush
into new varieties and would often take 2-3 years to make a varietal change. On
average, the farmers nominated 6.3% of their time was allocated to research, although
predominantly this was not trial-type research.
Good planning
The top farmers intended to dry seed an average of 35% of their crops. Planfarm
suggests that this is about 30% higher than the average farmer (ie the average farmer is
estimated to be around 20% dry seeding), although there is no data from the average
farmer group in this study to compare this against. The ability to dry seed a significant
portion of the farm was due to prior planning to ensure there was good weed control and
planning of rotations. One comment from the interviewer was that the depth of thought
and planning required for the successful integration of the systems was substantial, and
the group was able to convert the planning effort to results on the ground. The farmers
nominated that 16.2% of their time was allocated to planning and management.
Preparedness
Farmers said that they made most of their big decisions, regarding farm management,
outside of the high stress periods. This allowed them to concentrate on the operations
during seeding and harvest. The farmers were, on average, willing to change about 20%
of the farm program in response to changing seasonal conditions. Most of the top
farmers said that changing too much of the program introduced additional issues and
stress. In general, rotations were kept in place to ensure weed control and income.
Despite the apparent inflexibility of the program, farmers still said they maintained a level
of preparedness that allowed them to remain nimble in regards to tactical management
as the season progressed.
Timeliness
Combined with preparedness, the farmers indicate that timeliness was one of the top
practices that they needed to get right to ensure production. This included timeliness of
spraying and weed control, top-up fertiliser application and sowing time. Importantly,
sowing time was nominated as the key practice that the farmers had to get right to
maximise profit.
Commitment
The top farmers made a habit of getting the basic production factors right and not
allowing them to be distracted with other issues once a decision had been made. This
approach translated to them making very few mistakes in the areas that matter – both
production and financial. The comment from the interviewer was that in all cases, few
decisions were made that resulted in a substantial negative effect on the profit of the
business in any of the recent years that challenged the profitability of most other
businesses.
Positive about the future
The top farmers all showed a positive outlook for the future of agriculture. This is
evidenced through the responses that showed a desire to learn more and succeed, and
a real passion for agriculture. The farmers are all looking to continue to run successful,
profitable businesses.
Conclusion
Substantial improvements in the profitability of farm businesses in Western Australia are
likely. This study has shown that the top farmers are able to consistently produce a
higher operating surplus than average farmers and they are able to do this with very
similar rainfall, soils, varieties and farm size.
Key components of outstanding farm management seem to revolve around:
 passion
 planning
 preparation
 knowing and focusing-on what drives profit
 timeliness / getting the job done
 attention to detail
 being positive about the future
The Bridging the Yield Gap project, through the establishment of Local Innovation
Partnerships, will endeavour to help farmers improve the profitability of their businesses
by creating an environment and support structures that enables farmers to emulate the
characteristics of top farm business managers. The project will also use the top farmer’s
financial metrics as benchmarks to target
Key words
Profitability, Economics, Interviews, Benchmarks,
Paper reviewed by: Gerard O’Brien