2019/20 benchmarking a mixed bag

The 2019/20 financial year was a mixed bag. It had late/missed growing seasons, excellent weight gains from short growing seasons, record increases in beef prices, a relatively flat lamb market, reduction in wool market, and grains/pulses came off their record highs. Land prices also continued to rise with Central Queensland prices seeing the biggest increase again.

Most of the clients who contribute to our benchmarks are cattle producers, so the 56 per cent increase in trade animal value has had a positive effect on overall gross product (the true economic measure of production, after accounting for cash and inventory change).

However, the combined effect of all these factors kept a lid on Return on Assets (ROA) for the year. The top 20pc achieved a 7.5pc ROA and the average for all businesses during the 2019/20 financial year was 2.3pc. While these are solid results, they are 2pc lower than what was achieved when the cattle market increased 48pc in 2014/15 (see ROA graph).

When the next downward cycle in commodity prices comes through, what ROA will we see then with current land prices? What will land prices do? I suspect top 20pc ROA in the 4-6pc region is very likely. Only time will tell.

A consistent driver of profit is Overhead Ratio (the relationship between total overheads and gross product generated). Looking back over the past 20-plus years you can see the top 20pc (businesses that generated the highest ROA) kept their total overheads at about 30pc of their total gross product. By comparison, the average result is about double at 60pc. The following graph shows the consistent difference across the years. In effect, the average business has $0.30 less from each dollar earned contributing to profit, debt reduction, capital expenditure, reinvestment etc. Overheads per animal unit (OH/LSU or OH/DSE) have increased 75pc over the past 10 years via a consistent upward trend. This is worthy of strategic discussion within any business.

While on cost management, I would be remiss to not talk about the ever-important Cost of Production (COP) indicator. COP in 2019/20 for the top 20pc was $1.60/kg beef and the average producer $2.19/kg. NB. This is direct costs and overhead costs only. It doesn't include finance, tax or capital expenditure so add interest costs onto this, and there isn't much breathing space if prices drop.

History has shown that people spend what they earn. The results in ProfitProbe would agree! It appears that whenever we see a sniff of a price received increase, there is a corresponding increase in the cost of production.

The following graph goes back and uses the 1999 beef price received and COP as a base point. The results from then are expressed as a percentage of those 1999 values. These are the actual prices received and COP from ProfitProbe results. What we can see is a strong correlation between the two. Statistically, the changes in COP are 75pc correlated to the price received.

How do we use this information? The starting point is an awareness of the human (decision making) impact on cost of production. Are you spending money on items because you have free cash flow and can spend it? Or, are you investing money in items that you've determined are going to provide a desired return? The former approach spends what they earn; the latter are controlling their costs.

Receiving higher prices for what you produce won't help profitability if your COP goes up by the same amount.

If you would like to analyse your business via ProfitProbe and see the full benchmarking results for 2019/20, contact us for information on how to get started (service available to any producer at any time of year).