By Ian McLean
Earlier this year, Phil Holmes and I took a group of large Queensland producers we work with on a tour of southern NSW, to visit professionally managed grazing businesses. These businesses had excellent longer-term profitability, well within the top 25% of their region. This profitability was demonstrated by having good quality benchmarking data, with operating returns in the range of 4-8%, not just the managers claims.
The purpose of the tour was to get inside the heads of the managers of the business, and those above the manager, and understand how they approached the management of these businesses, and what made them so profitable. The management model used could be described as an effective adaptation of the Warren Buffett model to agriculture (see ‘A Good model’ article).
There was consistency across the people we spoke to, and the businesses we visited, in terms of what drove their performance;
- They were very clear on what their business purpose and core business is.
- Throughout the management structure, they had a very clear understanding of what the profit drivers of their enterprise(s) are, and an unrelenting focus on those profit drivers in the management
- They had a good understanding of their business performance, throughout their management structure again, and how management decisions affected that performance.
- A clear emphasis on being a low cost (per kilogram produced) producer.
- There was no attempt at vertical integration, pursuit of premium markets or anything else to distract them from being a low-cost producer.
- They keep things simple, there was no whiz-bang technology or fancy management systems.
- They performed very thorough due diligence on any property purchase (see our due diligence article).
These businesses are profitable now, by knowing what the fundamentals are for their production system and location, focusing on those fundamentals, and getting performance right along the way. They are not waiting in anticipation of a surge in demand from a booming Asian middle class to underpin their profitability, they are profitable now, as a function of things within their boundary fence.
If the rising Asian middle class does result in sustained increased prices at farm gate (a big if, given global competition) then it will be icing on the cake for them, if it doesn’t eventuate, then they will be profitable regardless.
The fundamentals vary for different production systems and different regions, but the principle is universal:
‘know and focus on the fundamentals for your enterprise’
I found the tour invigorating, it confirmed to me what can be achieved by focusing on the things that matter and reiterated that there is a very bright future for agriculture, for those that do it well.