Operating efficiency is an important metric measured in Planfarm’s business analyses, as it highlights how effectively resources within a farm business are being utilised and provides insight into the farm’s productivity and profitability.
As part of the analysis process, Planfarm consultants often set operating efficiency targets for their clients to work towards and help make strategic and informed decisions (i.e. resource allocation and farm management), adapt to changing market conditions, and maintain profitability in their industry.
For the majority of broadacre farmers, this target is set at 65%, ensuring that for every $1 of income made, the business retains $0.35 to cover business overheads, mitigate fluctuations in environmental and market conditions, and reinvest into their business. Planfarm has recently branched into horticulture consulting, working with horticulture businesses across WA and interstate, and it has
become apparent that the target of 65% is not necessarily achievable in other industries and therefore isn’t a one size fits all figure.
Why is the target operating efficiency for horticulture businesses 75-80% as opposed to 65% for broadacre businesses?
Each agricultural business operates with varied operational requirements, market conditions and business models, depending on their industry. Factors such as consumer demand, competition, the need for labour or mechanisation, environmental challenges, financial situation and the stage of the business’s lifecycle can all influence the desired level of operating efficiency and the priorities of the business year
in and year out.
Broadacre vs horticulture – who’s in front?
Both broadacre and horticulture are key contributors to the agricultural industry, however, is one more profitable than the other? When divulging this question, it is important to consider the influence of crop selection, market conditions, location (and therefore soil type and water availability), management practices, and individual circumstances on the profitability of each system.
Both industries have their own set of advantages and challenges that allow them to succeed as listed in Table 1 below.
Both systems are influenced by factors that affect the efficiency of the operation and profitability, meaning that it is difficult to determine if one is better than the other. To be profitable, farmers need to carefully evaluate their options, consider market demand, and make informed decisions based on the resources and expertise available.
Does a lower operating efficiency target actually mean it’s a better business?
Not necessarily. As operating efficiency is influenced by various factors such as management practices, utilisation of technology, labour efficiencies and market conditions, it comes down to how these are managed and optimised within an individual farm for maximum profitability. Where farmers choose to optimise efficiencies in their system differs greatly between broadacre and horticulture depending on
the focus of the business and key management practices around adoption of technology, labour use efficiency and market conditions. For example, a horticultural producer may decide it’s safer to operate with lower margins to meet market requirements, than risk operating at a loss.
It is also important to remember that the actual profitability of a business is reliant on overhead costs, as well as operating efficiency. As broadacre and horticulture businesses differ so greatly in scale and intensity (and livestock adds another level of complexity altogether) it is difficult to compare performance across industries. Any business that is on track to achieving or exceeding its operating efficiency target is in a good position.
To increase production or cut costs?
The decision whether to increase production for greater profits or to cut costs depends mostly on the specific circumstances of a business and its goals. Increasing production can lead to better economies of scale where the cost per unit decreases as the production volume increases, however, this likely won’t suit some horticultural businesses where land is often restricted and spreading resources may
affect product quality. In these businesses, focusing on cost reduction strategies (i.e. optimising resource utilisation or finding more cost-effective suppliers of inputs) can help save money and improve the bottom line.
It is recommended that every business achieves some level of cost reduction before attempting to scale their businesses. If a business has an operating efficiency of 70%, for every additional $1 they make in sales, they only receive a profit of $0.30. $1 saved in costs is often better than $0.30 made in profits.
Additionally, growers dealing with various crop types should also consider the profitability of those crops individually to ensure that other crops are not carrying the poor-performing ones. Assessing your enterprise mix for maximum yields and profits can help improve the overall operating efficiency of the business.
Take home.
Ultimately, the goal of any farm business is to optimise production, minimise costs and maximise profitability to ensure success and growth. This can be achieved through ongoing monitoring and improvement, however, it is important to remember that target metrics are often set for the average producer in your industry and depending on your circumstance, may not be reflective of what your results show.
It is also important to remember that success in farming is not solely determined by income, but also by factors such as personal satisfaction, lifestyle, and the fulfilment of working in the agricultural industry, whichever sector that may be.
