Pastoral company production and financial benchmarking

Summary

Project Scope and MethodologyThis project is the most extensive analysis yet undertaken of pastoral company performance in Australia. The dataset, which belongs to participants, is the largest dataset of beef business performance in Australia, outside of the Australian Bureau of Agricultural and Resource Economics and Sciences (ABARES)The project analysed 65 Northern pastoral company stations over six years. These were owned by six corporate entities who collectively manage 176 million hectares.

Management accounting principles were used for the analysis with the unit of measurement being the Animal Equivalent (AE). Collectively, the performance of over one million AE were analysed.

Herds were segregated into Breeding, Breeding and Growing, and Growing on an individual station (business unit) level for analysis.

Key findings

Better performing businesses generally had higher productivity, more targeted herd expenditure, better labour efficiency and sufficient operating scale. These characteristics of better performers are consistent with the family operators.There was significant variation in the performance observed between (and within) companies, stations, regions, enterprises and yearsThe findings of this project are consistent with analysis of the non-corporate sector in The Australian Beef Report (Holmes, McLean & Banks, 2017) which found that both operating scale and operating efficiency are required for good profits to be achieved.Operating Efficiency results from the key areas of the business being highly productive, that is more production resulting from each unit of input. As a general rule, the more productive a business becomes, the more efficient it will be, assuming it is done cost effectively. The key elements of beef business productivity are land, labour and livestock.Operating scale is primarily about having sufficient scale to achieve competitive overhead expenses on an AE basis.Once a business has sufficient operating scale, more scale is not necessarily a good thing as the incremental benefits of additional scale are not ongoing,  bigger is not always better. On the other hand, operating efficiency should be a focus of continual improvement for all beef businesses, regardless of scale.Improved performance in the latter years (2014 – 2018) was a function of a beef price increase, rather than improved productivity.Performance per AE was the main driver of the profitability of business units, more so than the number of animal units.
 
Income

The main driver of herd income is herd productivity, expressed as kilograms of beef produced per AE per year. The price received for the beef turned off is more important here than in other studies, but is still secondary to herd productivity.

Breeding enterprises dominated the dataset. Nearly all of the productivity of breeding herds can be explained by reproductive rate, mortality rate and sale weight, with reproductive rate being the most important.

Differences in herd income explained almost all herd profit differences, with total herd expense differences making only a minor contribution.
 
Expenses

An efficient and effective cost base is required for good profits to be achieved, but low expenses alone did not determine profitability. Productive herds with a competitive cost base achieved reasonable profits per AE, whereas unproductive herds with a low-cost base did not.

Better performing enterprises have lower direct herd expenditure (enterprise expenses) yet higher herd productivity. This finding is consistent with the characteristics of better performers generally and indicates that the herd expenditure is better targeted and more effective.

Operating scale and labour efficiency are the main determinants of overhead expenses.

Labour efficiency in the range of 1,500 to 2,500 AE/FTE is essential for stations to have a competitive overhead expense per animal unit. There is a minimum overhead cost of $50/AE regardless of scale.
 
Profit and Profitability

The value of the underlying land asset also influences the profitability of the business unit. The data show that the inherent productivity of land is more than reflected in the land values, meaning more productive land is not necessarily more profitable, although it did achieve higher profits per AE.

There were locations where the low inherent productivity of the landscape prevented the achievement of profits, and locations where the high value of land conspired against reasonable profits translating into good profitability.

The minimum operating scale required for large pastoral company enterprises is greater than that of private operators, at over 10,000AE compared to 3,000AE. There is a limit to the benefits of additional scale.

Having good operating efficiency and sufficient operating scale is generally more important in achieving superior performance than enterprise type or region.