Is scale everything?

Posted on 27/1/2022

Agribusiness

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Overview:

With last year’s cropping season now complete, it is a good time to allocate some genuine time to critically review the year that was. Specifically identifying what produced results and what didn’t, will provide a solid starting point in determining the opportunities that exist and strategies you need to implement for the years ahead. Undoubtably, in this process, the area and utilisation of the area being cropped would most certainly be considered.
Is scale everything?

Although scale in modern farming is certainly important, bigger is not always better.  It is a common misconception that simply adding more ground via leasing or purchasing will deliver more profitability.  With ever increasing leasing rates and some significant widespread increases in land values based on recent sales, increasing size should by no means be treated as an ‘at any cost’ proposition. It’s important that it is considered in conjunction with your specific farming operations and broader long-term business plan and succession strategies as a whole.

Considerable thought should also be given to the labour force you have available, your plant and equipment capabilities, historical gross margins produced on similar ground, and the overall financial capabilities, strategy and risk profile of your business. If after assessing all of these factors, should an increase in size be initially viable, a leasing rate or purchase price that would work for your specific business can be determined.  With this information in-hand, you are better positioned to decide whether to take up a land leasing or purchase opportunity. You are also better informed regarding what amount to offer under a tender, and decisions can be made based on what works for your business and not on whether the neighbour ‘will, could or should’ pay for the same ground.

And then equally as important as scale considerations, are those of the efficiency and utilisation capabilities of your existing resources, plant equipment and available farming land.  Focusing your time on other areas, such as increasing yields by a few percent, looking for opportunities to value-add and better market your commodities, or considering other ways to compliment or improve your cropping program, may result in a significantly better financial return than simply cropping more hectares.  Make sure you’re working smarter, not harder.

Together with your accounting partner and other key advisors, critically analysing your farming operations and comparing the financial outcomes under varying scenarios may provide some surprising results and present new opportunities that weren’t previously clear.

Speak to one of our Agribusiness Directors.

Matthew Petersen

Matthew Petersen

Providing expert advice in taxation and accounting, asset protection, business structures and succession planning. Matthew is a key member of the firm’s Agribusiness specialisation.

Kim Bigg

Kim Bigg

Assisting clients to plan for the transition to retirement and the associated requirements of estate and succession planning. Kim is a specialist in Self-Managed Super Funds.

Neil Oakes

Neil Oakes

Providing tax consulting advice to small, medium and large enterprises, with specific focus in the aged-care and property industries.

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