farm financial performancedata.daff.gov.au/brs/data/warehouse/pe_abarebrs99001155/...180...

180 australiancommodities • vol. 12 no. 1 • march quarter 2005

f a r m p e r f o r m a n c e

FARM FINANCIAL PERFORMANCEbroadacre cropping incomes fall but incomes for beef farms strengthenPeter Martin, Jo-Anne King, Phantipa Puangsumalee, Catherine Tulloh and Rhonda Treadwell

• Lower winter rainfall across much of Aus-tralia’s wheat and winter grain producing regions in 2004 reduced overall crop produc-tion and, in combination with lower interna-tional grain prices, has sharply reduced the forecast incomes of grain farms in most states in 2004-05.

• Incomes for broadacre livestock produc-ers are forecast to increase in 2004-05 de-spite lower wool prices. Higher prices for beef cattle combined with increased cattle turnoff and continuing strong sheep and lamb prices are driving incomes higher for livestock farms.

• Increases in international dairy prices, higher milk production and lower feed prices are expected to result in incomes for dairy farms also increasing in 2004-05.

• High demand for agricultural land in the past four years has resulted in signifi cant in-creases in farm values, boosting farm equity.

Farm incomes increaseIn this paper, the current fi nancial performance of Australia’s broadacre and dairy farms is presented. ABARE’s farm survey data are used to gain insights into the performance of Australian farms in the period since 2002-03, including farmers’ access to drought assistance payments and farm management deposits, and to analyse projected farm fi nancial perfor-mance in 2004-05.

The fi nancial performance of Australian farms has steadily improved in the past two years as drought, that was most severe and widespread in 2002-03, has receded (maps 1). Through both the period of the drought and the period of recovery, prices for livestock and grains have remained high in historical terms, assisting farms manage cash fl ow through this period of reduced production. High beef cattle prices over the past three years have been particularly important in improving farm incomes as more Australian farms carry beef cattle than engage in any other farming enterprise.

Strong demand for rural land has resulted in rising farm capital values offsetting the impact of increases in working capital debt resulting from reduced cash fl ow and the reduction in livestock and crop inventories on farm equity. At the end of the 2003-04 fi nancial year the average equity ratio estimated for Australian broadacre farms was higher than it has been in any year since the 1980s. Servicing debt through this period has also been assisted by Australia’s historically low interest rates.

Changes in the payment options for grains delivered to pools operated by the major grain outlets, AWB Limited and ABB Grains, have also had a substantial impact since 2000-01 on the cash fl ow for grain producing farms, providing the opportunity to move grain receipts between fi nancial years. These changes, in combination with the use of farm management deposits, have contributed substantially to reducing the vari-ability in cash fl ow of grain farms in the past four years.• Peter Martin • +61 2 6272 2363 • [email protected]


181australiancommodities • vol. 12 no. 1 • march quarter 2005

However, drought in the 2002–04 period had a more severe impact on irrigated agriculture than did previous droughts. Low availability of irrigation water continues to have an impact on some industries in 2004-05, particularly the rice industry where the area planted to rice has been severely reduced.

Financial performance of Australian farms

Each year ABARE surveys a large number of producers in the broadacre and dairy sectors of Australian agriculture through the Austra-lian agricultural and grazing industries survey and the Australian dairy industry survey. These surveys provide detailed fi nancial and physical information on farm business and the socioeco-nomic circumstances of their operators.

Information provided by farmers in the surveys in November and December 2004 in combina-tion with preliminary data collected earlier in the year has been used to project farm fi nancial performance estimates for the 2004-05 fi nancial year. The information collected provides a basis for analysing the current fi nancial position of broadacre and dairy industries and the expected changes in the short term.

Projections of farm performance refl ect pro-ducers’ plans and expectations as at November 2004. In some areas of Australia, seasonal condi-tions may have improved by more than antici-pated in November, while in others, seasonal conditions may have deteriorated.

Estimates for 2004-05 will be progressively updated in future data releases by ABARE as new information is incorporated.

Farm receiptsBelow average winter rainfall in most major grain producing regions of Australia resulted in winter crop production in 2004-05 being below the average for the previous fi ve years in all states except Western Australia. Only in northern New South Wales is there estimated to be a substantial increase in grain production in 2004-05.

Prospects for 2004-05 summer crops appear good. Improved seasonal conditions through summer relative to 2003-04 and the availability of more irrigation water in northern New South Wales and southern Queensland are estimated to have resulted in a substantial increase in the area planted to sorghum, cotton and other summer crops, and yield prospects for summer crops are good.

However, prices received by farmers for grains are forecast to be lower in 2004-05 because of

1 Seasonal conditions



increased world grain production. Prices for all major grains, oilseeds, pulses and cotton are fore-cast to fall relative to prices received in 2003-04. Overall, receipts from crops are projected to fall by around a quarter for broadacre farms in 2004-05 relative to 2003-04.

At the national level, wool production is projected to rise in 2004-05 and more wool is expected to be brought forward for sale from on-farm stocks. However, weaker demand is fore-cast to result in lower wool prices and a reduc-tion in farm receipts for wool.

A gradual rebuilding of cattle herds and sheep fl ocks from the 2002-03 drought is projected to occur in all states, with an increase in the number of lambs marked and calves branded in 2004-05. Nevertheless, net turnoff of sheep, lambs and beef cattle is projected to increase in 2004-05 in response to the strong incentives of historically high sale prices.

At the national level, increases in receipts for livestock are not forecast to be suffi cient to offset lower receipts from crops and wool, resulting in overall receipts for broadacre farms falling by

around 5 per cent in 2004-05 compared with the previous year.

Milk receipts are also projected to increase in 2004-05. Higher international prices for dairy products are forecast to lead to an increase in farm gate milk prices in 2004-05. After declining in 2003-04, dairy cow numbers are forecast to rise during 2004-05. Improved seasonal condi-tions, reduced grain and fodder prices and in-creased water availability in the major dairy areas are forecast to lead to an increase in milk production.

Farm costsBroadacre and dairy farm expenditure was high in 2003-04, with increased expenditure incurred in planting and harvesting a record winter crop, record livestock purchase expenditure and con-tinued high expenditure on livestock feeding in many regions.

Overall, broadacre farm costs are forecast to fall by around 4 per cent in 2004-05, mainly because of reduced expenditure on livestock purchases and fodder as well as reduced crop

Major fi nancial performance indicatorsFarm cash income = total cash receipts – total cash costs

Farm business profi t = farm cash income + changes in – depreciation – imputed trading stock labor costs

Profi t at full equity = farm business profi t + rent + interest and + depreciation fi nance lease on leased terms payments

Rate of return = profi t at full equity total opening capital x 100

Off-farm income = wages off-farm + other business income + investment + social welfare payments

Total revenues received by the farm business during the fi nancial year

Payments made by the farm business for materials and services and for permanent and casual hired labor (excluding owner manager, partner and family labor)

(Return produced by all the resources used in the farm business)

(Return to all capital used)

(Owner manager and spouse only)



harvesting and marketing costs, because of the much smaller grain crop, combined with a reduction in repairs and maintenance expendi-ture. Expenditure on repairs and maintenance is partly discretionary and is often reduced when farm receipts fall.

The reduction in total costs is despite a fore-cast increase in the index of prices paid by farmers of around 3 per cent that has resulted mainly from higher prices for fuel and fertilisers and despite falls in the price of other inputs such as feed grains and hay.

However, lower feed grain and fodder prices together with improved seasonal conditions, reducing the requirement to purchase feed, are projected to have a substantial impact on the dairy industry, where expenditure on purchased feed is projected to fall by over 10 per cent in 2004-05 despite an increase in dairy cow numbers.

Farm cash income and farm business profi t

In 2003-04, farm cash income for the broadacre industries as a group increased from the drought reduced income in 2002-03 to slightly above the long term average (fi gure A) in real terms. Near record winter crop receipts and high livestock receipts more than offset increases in total farm cash costs (table 1).

Farm cash income for broadacre farms is projected to fall by around 11 per cent in 2004-05 to just below the long term average, in real terms, and to be similar to the farm cash income in 1999-2000, as reductions in farm cash receipts exceed reductions in farm cash costs (fi gure A).

Farm cash income is a measure of the cash funds available for farm investment and consumption after paying all costs incurred in production, including interest payments, but

1 Financial performance Average per farmAll broadacre industries

2002-03 2003-04 p 2004-05 s

Total cash receipts $ 257 589 280 680 (28) 266 600Total cash costs $ 205 792 213 650 (41) 205 000

Farm cash income $ 51 797 67 040 (18) 61 500Farms with negative farm cash income % 33 27 (9) 27

Farm business profi t $ –27 405 6 980 (96) 700Farms with negative farm business profi t % 71 62 (3) 59Profi t at full equity – excl. capital appreciation $ –6 589 31 930 (21) 24 000 – incl. capital appreciation $ 143 787 234 880 (9) na

Farm capital at 30 June a $ 2 244 521 2 502 980 (6) naNet capital additions $ 39 240 41 990 (37) naFarm debt at 30 June b $ 223 898 218 410 (5) 198 900

Equity at 30 June bc $ 1 893 511 2 147 820 (7) naEquity ratio bd % 89 91 (1) na

Harvest loans at 30 June e $ 6 093 6 460 (14) naFarm liquid assets at 30 June b $ 133 540 142 580 (12) naFarm management deposits (FMDs) at 30 June b $ 22 377 25 730 (11) naShare of farms with FMDs at 30 June b $ 17 23 (8) na

Rate of return f – excl. capital appreciation % –0.3 1.5 (20) 1.0 – incl. capital appreciation % 7.5 11.1 (8) na

Off-farm income of owner manager and spouse b $ 29 023 27 030 (10) na

a Excludes leased plant and equipment. b Average per responding farm. c Farm capital minus farm debt. d Equity expressed as a percentage of farm capital. e Harvest loans are not included in farm debt. f Rate of return to farm capital at 1 July. p Preliminary estimates. s Provisional estimates. na Not Available.Note: Figure in parentheses are standard errors, expressed as percentages of the estimates.



excluding capital payments and payments to family workers. It is a short term measure of farm performance because it takes no account of depreciation or changes in farm inventories.

A longer term measure of profi tability that takes account of capital depreciation and changes in inventories of livestock, fodder, grain, wool etc is farm business profi t.

Farm business profi t for the broadacre indus-tries is also expected to fall in 2004-05, by a similar amount to the reduction in farm cash income (table 1). While increases are projected in inventories of livestock on farms, these increases are expected to be similar to 2003-04, but wool and grain stocks on farm are expected to fall. Increased livestock numbers will enhance farms’ ability to generate cash fl ow beyond 2004-05.

Rates of returnRates of return to total farm capital are expected to rise in most states in 2004-05 after having been relatively low in both 2003-04 and 2002-03 for many industries (tables 2, 3).

However, strong demand for rural land in the past three years has resulted in increased land

All broadacre industriesAFarm cash income

Farm business profit

1997-98

2004-05

1983-84

1990-91

1977-78

–60

–40

–20$’000

20

40

60

80

100

2004-05

2 Financial performance, by state Average per farmBroadacre and dairy industries

Farm cash income Farm business profi t a Rate of return b

2002 2003 2004 2002 2003 2004 2002 2003 2004 -03 -04 p -05 s -03 -04 p -05 s -03 -04 p -05 s

$ $ $ $ $ $ % % %All broadacre industriesNew South Wales 33 250 33 160 52 400 –48 050 –23 510 –6 400 –1.7 0.2 0.6Victoria 45 465 49 320 47 100 –22 514 2 700 3 400 –0.6 1.1 1.1Queensland 32 063 39 410 55 700 –67 895 –23 250 – 200 –1.8 0.1 0.9Western Australia 89 519 177 500 119 500 16 059 101 900 21 600 2.0 5.0 1.9South Australia 111 448 138 430 67 400 26 837 65 540 –8 900 2.3 3.6 0.6Tasmania 45 455 48 480 57 000 10 271 –1 240 11 100 1.7 0.9 1.5Northern Territory 133 304 539 870 211 600 377 489 179 470 262 300 5.8 2.9 3.8

Australia 51 797 67 040 61 500 –27 405 6 980 700 –0.3 1.5 1.0

Dairy industryNew South Wales 35 207 59 930 72 100 –35 575 –10 840 – 400 –0.7 0.3 1.0Victoria 31 718 56 340 74 300 –49 333 –14 690 3 900 –1.2 0.9 1.9Queensland 7 769 57 020 58 400 –61 840 –18 930 –19 800 –3.4 –0.4 –0.1Western Australia 63 595 74 100 87 400 16 466 –17 580 5 900 1.7 0.6 1.1South Australia 45 646 84 050 104 900 –6 895 –3 010 22 300 1.8 1.5 2.2Tasmania 98 452 65 680 101 100 35 919 –15 520 25 200 3.7 1.2 3.1

Australia 34 727 59 440 75 400 –40 027 –14 210 2 500 –0.7 0.7 1.6

a Defi ned as farm cash income plus buildup in trading stocks, less depreciation and the imputed value of operator partner and family labor. b Defi ned as profi t at full equity, excluding capital appreciation, as a percentage of total opening capital. Profi t at full equity is defi ned as farm business profi t plus rent, interest and lease payments less depreciation on leased items. p Preliminary. s Provisional estimates.



values in most farming regions, raising the total capital value of farms.

Rates of return presented in this article are calculated by dividing farm business profi t ad-justed to a full equity basis by opening total farm capital. That is, farm business profi ts have been adjusted by adding on interest and leasing costs removing the effects on profi t of the fi nancing arrangements in place. Two rates or return are estimated: the rate of return excluding capital appreciation and the rate of return including capital appreciation.

Rising farm capital values in recent years have reduced rates of return excluding capital appre-ciation but have led to historically high rates of return including capital appreciation (table 3).

Performance, by stateBroadacre farm cash income in 2004-05 is fore-cast to rise in New South Wales, Queensland and Tasmania, but to fall in other states relative to the farm cash income recorded in 2003-04 (table 2). However, farm business profi t is fore-cast to improve signifi cantly for all states except Western Australia and South Australia in 2004-05, as a consequence of increases in the number of beef cattle and sheep on farms as herds and fl ocks are rebuilt.

On average, the fi nancial performance of farms in New South Wales, Victoria and Tas-mania is projected to be stronger in 2004-05 than in 2003-04, with higher average profi ts, lower average debt and a smaller percentage of farms with negative farm business profi t.

In New South Wales, increased winter crop production in northern and central regions is projected to lead to an increase in average farm cash income, despite lower grain prices and reductions in beef cattle turnoff. However, the southern cropping areas winter crop production was lower, and lower winter crop production in Victoria, South Australia and Western Australia is projected to result in a fall in farm cash income in these states.

Record winter crop production in Western Australia in 2003-04 led to very high farm cash incomes. Many grain producers in Western Aus-tralia and, to a lesser extent in South Australia

and Victoria, opted to receive a substantial pro-portion of the receipts from the 2003-04 crop in 2004-05. As a consequence, average farm cash incomes for broadacre farms in these states in 2004-05 are projected to be higher than would be expected based on the reductions to crop pro-duction and prices.

Farm cash income for Queensland broadacre farms in 2004-05 is being affected by continued low winter grain production and a forecast in-crease in summer crop production. Overall, farm cash income for Queensland broadacre farms is forecast to increase in 2004-05 because of higher receipts from beef cattle.

While overall cattle numbers are expected to increase in response to increased breeding rates, turnoff of male cattle is expected to remain high. The increase in beef cattle numbers will also result in a substantial increase in farm business profi t as trading stocks are rebuilt.

Performance, by industrySummary information on fi nancial performance in Australian broadacre and dairy industries is given in table 3 and fi gure B.

Wheat and other crops industryFarm cash income for the wheat and other crops industry rebounded strongly in 2003-04 from the drought reduced 2002-03 income. High grain prices during 2003-04 combined with a 40 per cent increase in grain production led to farm cash income at the national level returning to near predrought levels.

However, farm cash income is expected to fall sharply in 2004-05. A reduction of almost 20 per cent in winter grain production combined with lower grain prices is forecast to result in a 25 per cent fall in crop receipts. The impact of reduced grain production on farm receipts has been cush-ioned in some states by payments received from the record 2003-04 harvest carried forward into 2004-05.

Overall, cash costs for wheat and other crops industry farms are projected to fall by 4 per cent, despite increased expenditure on fuel and fertiliser, because of the lower cost of marketing a much reduced crop and as farms reduce some



of their discretionary spending on repairs and maintenance.

Business profi ts for wheat and other crops industry farms in 2004-05 are projected to be similar to those of the late 1990s but well below those of 2001-02 and 2003-04.

Mixed livestock–crops industryFarm cash income for the mixed livestock–crops industry rose in 2003-04 as producers with reduced livestock numbers expanded the

area plated to winter grains in southern states. Increased winter crop production in combina-tion with high lamb and beef prices resulted in average farm cash income increasing by almost a third.

Lower winter crop production in 2004-05 and reduced grain prices are expected to result in crop receipts falling by around 14 per cent. However, this reduction will be partly offset by increased receipts from the sale of lambs, sheep and, particularly, beef cattle. Despite an increase

3 Financial performance, by industry Average per farmAll broadacre farms

Farm cash income Farm business profi t p

2002-03 2003-04 p 2004-05 s 2002-03 2003-04 p 2004-05 s

$ $ $ $ $ $

Wheat and other crops 105 810 168 740 85 100 1 290 90 980 –9 500

Mixed livestock crops 65 720 87 680 82 300 –14 940 18 550 11 700

Beef industry 28 140 30 040 48 600 –46 580 –22 990 13 400 – farms with less than 300 beef cattle 3 304 5 910 16 200 –56 022 –36 990 –27 600 – farms with more than 300 beef cattle 66 110 69 420 106 400 –35 379 100 62 000

Sheep 33 980 24 680 40 900 –31 490 –24 210 –19 300 – farms with less than 3000 sheep 11 510 6 260 13 400 –45 710 –39 240 –38 200 – farms with more than 3000 sheep 75 990 69 980 86 400 –8 280 15 850 8 700

Sheep–beef 22 390 26 550 55 300 –44 690 –26 020 –8 400

All broadacre industries 51 800 67 040 61 500 –27 410 6 980 700

Dairy 34 730 59 440 75 400 –40 030 –14 210 2 500

Rate of return – excluding Rate of return – including capital appreciation a capital appreciation

2002-03 2003-04 p 2004-05 s 2002-03 2003-04 p

% % % % %

Wheat and other crops 1.5 5.5 1.1 6.8 13.8

Mixed livestock crops 0.5 2.4 1.7 8.5 13.5

Beef industry –1.7 –0.5 1.2 7.4 8.1 – farms with less than 300 beef cattle –6.6 –3.9 –2.4 –1.7 8.6 – farms with more than 300 beef cattle –0.2 0.7 2.1 10.2 7.9

Sheep –1.1 –0.6 –0.2 8.6 9.8 – farms with less than 3000 sheep –3.7 –3.2 –3.0 6.4 10.1 – farms with more than 3000 sheep 0.8 1.5 1.3 10.5 13.7

Sheep–beef –1.3 0.2 0.6 5.0 11.1

All broadacre industries –0.3 1.5 1.0 7.5 11.1

Dairy –0.7 0.7 1.6 7.2 9.3

a Defi ned as profi t at full equity, excluding capital appreciation, as a percentage of total opening capital. Profi t at full equity is defi ned as farm business profi t plus rent, interest and lease payments less depreciation on leased items. p Preliminary. s Provisional estimate.



in wool production and an increase in the sale of wool from on-farm stocks, lower overall receipts are projected for wool.

Sheep industrySheep industry farm cash income fell slightly in 2003-04 on the back of reduced wool receipts, but was still above income levels of the mid to late 1990s (fi gure B). Expenditure on sheep purchases was historically high, because of high prices and increased sheep purchases. An increase in the number of lambs marked resulted in a small increase in sheep numbers, a rise in livestock inventories and an improvement in farm business profi t.

In 2004-05, farm cash income is forecast to rise despite a projected fall in receipts from wool. Receipts from the sale of lambs and sheep, together with increased receipts from beef cattle and a reduction in expenditure on sheep purchases and fodder are projected to more than offset lower wool receipts and result in farm cash income rising to be just below the long term average (fi gure B).

Falls in sheep numbers since the early 1990s and growth in international demand have resulted in rising real lamb and mutton prices over this period and sheep industry producers have become increasingly more reliant on income from lamb and sheep sales. For example, receipts from sheep and lambs have risen from 14 per cent of average farm receipts in 1990-91 to over 40 per cent in 2004-05.

Sheep–beef industryDrought in 2002-03 had a relatively more severe impact on this industry, because of the location of a high proportion of farms in this industry in regions of New South Wales and Queensland most severely affected by drought in 2002-03. The reduction in sheep numbers, particularly on Queensland farms was very large. In the period since 2002-03, many Queensland producers have not rebuilt sheep numbers and have mainly increased beef cattle numbers, effectively mov-ing from the sheep–beef industry to the beef industry.

In other states, both sheep and beef cattle numbers in this industry increased in 2003-04 as

turnoff was reduced, subduing increases in farm cash income.

Farm cash incomeBWheat and other crops

Mixed livestock–crops

Sheep

Sheep–beef

1997-98

2004-05

1983-84

1990-91

1977-78

1997-98

2004-05

1983-84

1990-91

1977-78

1997-98

2004-05

1983-84

1990-91

1977-78

50

$’000

100

150

2004-05

50

$’000

100

150

200

2004-05

Sheep

Grains

$’000

20

40

60

80

2004-05

Beef



Both sheep and beef cattle turnoff is pro-jected to increase in this industry in 2004-05, together with a steady increase in beef cattle and sheep numbers kept on farms as a result of higher natural increase. Turnoff of beef cattle is expected to increase by almost 10 per cent.

Higher livestock turnoff in combination with higher beef cattle prices and strong sheep and lamb prices are expected to result in increased total cash receipts despite a small reduction in wool receipts.

Livestock purchase costs were histori-cally high in this industry in 2003-04 and are projected to remain high in 2004-05, resulting in an increase in total cash costs.

Overall, farm cash income is forecast to in-crease in 2004-05 to above the long term average, in real terms, and with increases in sheep and beef cattle numbers, farm business profi t is expected to return to the level of the late 1990s.

Beef industryBeef cattle turnoff fell on beef industry farms in 2003-04 as farms began to rebuild herds and, despite much higher beef cattle sale prices, the increase in farm receipts was relatively small. At the same time, farm cash costs increased, despite a 50 per cent reduction in expenditure on fodder relative to 2002-03, as expenditure on purchases of beef cattle rose to record levels. Overall, with only a small increase in receipts and an increase of almost as much in costs there was only a slight increase resulted in farm cash income in 2003-04 relative to 2002-03, but increases in cattle numbers resulted in a much larger improvement in farm business profi t.

In 2004-05, beef cattle turnoff is forecast to increase by around 4 per cent and in combina-tion with higher beef cattle prices and lower cash costs result in farm cash income rising to above the long term average, in real terms, to be similar to incomes in the late 1990s.

Continued increases in cattle numbers are projected to result in an even larger increase in farm business profi t to be comparable in 2004-05 with some of the higher income predrought years such as 2000-01.

The beef industry is the most widespread agri-cultural industry in Australia and contains farms with a very wide range of herd sizes. Because a very large proportion of beef industry farms have relatively small herds, this results in the average performance of the industry being heavily infl u-enced by the generally poorer performance of small farms.

Broadacre industriesThe broadacre sector of Australian agriculture is defi ned to include fi ve industry types:

Wheat and other crops industryThe wheat and other crops industry represents the more specialist producers of cereal grains, coarse grains, pulses and oilseeds.

Mixed livestock–crops industryThe mixed livestock–crops industry covers farms engaged in the production of sheep and/or beef cattle in conjunction with substan-tial activity in broadacre crops such as wheat, coarse grains, oilseeds and pulses.

Sheep industryThe sheep industry represents the more special-ised producers of sheep and wool. However, the number of properties classifi ed to the industry, along with the industry’s contribution to wool production, has declined substantially since the early 1990s as producers have diversifi ed enterprises. Currently, sheep industry farms account for only around a third of Australia’s wool production. The majority of both wool and sheep meat production occurs on mixed enterprise farms, particularly on mixed live-stock–crops industry farms.

Beef industryThe beef industry covers properties engaged mainly in running beef cattle and accounts for around 60 per cent of Australia’s beef produc-tion. The beef industry contains a large number of small farms.

Sheep–beef industryThe sheep–beef industry covers properties engaged in running sheep and beef cattle. As for the sheep and beef industry, this industry also contains a large number of small farms.



Table 3 contains farm performance results for the beef industry divided into two groups — farms with less than 300 beef cattle and those with more than 300. The fi nancial performance of larger herd size farms is more comparable with that of other industries that do not contain so many small farms. Farm performance esti-mates are also provided for small and large fl ock size sheep industry farms in table 3, because the sheep industry also contains many relatively small farms.

Increases in land values in northern pastoral areas of Australia have been particularly large in recent years because of strong demand from producers. These increases have resulted in high rates of return including capital appreciation for larger herd size farms, particularly in 2002-03 despite this having been a drought year (table 3).

Dairy industryAverage farm cash income for the dairy industry increased in 2003-04 from the historical low recorded in 2002-03 but still remained below the long term average, in real terms (fi gure C). The improvement in farm cash income was mainly driven by reductions in cash costs. Receipts from milk declined due to a combination of lower milk prices and a further reduction in both dairy cow numbers and milk yields. However, improvement to grazing conditions, improved irrigation water availability and lower feed grain and fodder prices resulted in lower feed costs, more than offsetting lower receipts and raising farm cash income.

In 2004-05, receipts from milk are projected to increase, with higher milk prices and a small increase in milk production. With further improvement in seasonal conditions and lower feed grain prices, increases in cash costs are projected to be small and average farm cash income for the dairy industry nationally is fore-cast to increase to be just above the long term average (table 3 and fi gure C).

Dairy farms expenditure on purchased feed has fallen by around a third in the past two years from an average of $95 000 per farm in 2002-03 to $62 000 in 2004-05. Part of this reduction in expenditure on purchased feed has been offset by increased spending on feed production on-

farm including increased expenditure on fuel, fertiliser and other crop and pasture expenses.

Farm investment

Land transactionsThe period between 2001 and 2004 was char-acterised by a large number of land transactions on rural holdings. Within the broadacre sector of Australian agriculture, the proportion of farms acquiring additional land has remained histori-cally high since 1998 (fi gure D).

Average land values for broadacre farms increased by over 50 per cent, in real terms, between June 2001 and June 2004 (fi gure E). The largest percentage increases in real land values have been in pastoral northern Australia and near urban and coastal fringes of southern Australia (fi gure F).

Increases in land values have resulted from a number of factors, including higher farm in-comes. Following a sharp downward correction to land values in 1991, primarily in response to reduced commodity prices, average land values increased only slightly in real terms in the decade between 1991 and 2001. However, over the same period, real farm cash incomes increased signifi cantly (fi gure A) particularly in the wheat–sheep zone and pastoral areas of northern Australia. Increased demand for rural land has also been fueled by historically low

Dairy industryCFarm cash income

Farm business profit

1997-98

2004-05

1983-84

1990-91

1977-78

–40

–60

–20

$’000

20

40

60

80

100

2004-05



interest rates, the prime lending rate averaging 8.5 per cent between 2001 and 2004, slightly higher than half the rate applying in the early 1990s. In addition, the general increase in resi-dential property values in Australia in the period since 1997 has resulted in increased demand for rural land from urban Australians seeking rural lifestyle and investment.

According to results from ABARE’s broad-acre surveys, the proportion of broadacre farms acquiring additional land has been over 5 per cent in each of the past fi ve fi nancial years (fi gure D). Farmers acquiring additional land are, on average, younger and operate farms that generate better than average rates of return in

the period prior to land acquisition (Martin et al. 2002). Farmers disposing of land are older and operate farms generating lower rates of return, but do not necessarily operate smaller farms.

The high level of land transactions over this prolonged period would suggest a substantial amount of structural adjustment has been occur-ring in Australian agriculture. However, while a substantial amount of farm amalgamation may have occurred, there has also probably been a high level of new entrants to farming in regions of higher amenity value acquiring small farms with low income potential (Barr 2002). Histori-cally, periods of high land trading activity and high prices have also provided the conditions

for farm operators to purchase land at too high a price relative to its longer term earning potential, leading to debt servicing and adjustment pres-sures in subsequent years.

Farm business debtIncreased investment in land has been accompa-nied by increased investment in plant, machinery, motor vehicles, equipment and improvements on farms. In part, this increased investment has been fi nanced from farm profi ts, but has also been fi nanced by increased borrowing.

Farm debt has risen steadily since 1991, broadly in line with the increase in the receipts of farms borrowing (fi gure G). Average receipts for farms

F

index

Land prices for broadacre farms

High rainfall zone

Wheat sheep zone

Pastoral zone

Using average land values in 1977-78 (in 2003--04 dollars) as the base (=100)

100

200

300

400

1997-98

2003-04

1985-86

1991-92

1979-80

E

$/ha2003-04

Land prices, broadacre farms

100

150

200

250

300

1997-98

2003-04

1985-86

1991-92

1979-80

D

%

Proportion of broadacre farms expanding

2

4

6

8

1997-98

2003-04

1985-86

1991-92

1979-80



not having debt have been both lower historically, refl ecting lesser capacity to service debt, and have increased by relatively less over time, probably refl ecting a lower level of new investment and productivity growth among these farms.

Farm business debt increased sharply in 2002-03 for broadacre farms, partly owing to drought causing reduced cash fl ow, increasing the re-quirement to borrow to raise working capital, and partly to continued strong investment in the broad-acre sector. With the increase to farm incomes in 2003-04, average debt is estimated to have fallen and is expected to fall further in 2004-05.

In this paper, farm business debt estimates have been provided exclusive of debt that is

underwritten, including harvest loan and dairy structural adjustment advances. Inclusion of harvest loans in estimates of farm business debt results in substantial falls in farm debt for grain producing farms in drought years as crop production is reduced, masking the increases in working capital debt that usually occurs. Conversely, debt increases in years of high crop production when cash fl ow is also high. Harvest loans and dairy structural adjustment payments are reported separately in many tables.

Increased farm capital values that have been the consequence of rising prices for rural land in recent years have offset the impact of increases in farm debt on farm equity, resulting in farm equity ratios being historically high. Broadacre farm equity at 30 June 2004 is estimated to have been 91 per cent, an average equity ratio last recorded in the late 1980s. The proportion of broadacre farms with equity ratios below 70 per cent improved from 8 per cent in June 2003 to 6 per cent in June 2004. However, the propor-tion of dairy farms and wheat and other crops industry farms with equity below 70 per cent increased from 14 per cent in 2003 to 17 per cent in 2004.

Assets available to farm businesses to meet short term funding needs, including bank de-posits, farm management deposits and other investments readily convertible to cash, remain historically high, despite having been signifi -cantly drawn down to boost low cash fl ows in 2002-03. As a consequence, the trend in net farm debt — that is farm business debt less liquid assets — has remained relatively fl at since 1992-93 (fi gure H).

Investment returnsReturns on investment in agricultural industries are often low when reported across a whole industry. However, low average returns are partly a consequence of the generally high proportion of small farms in many industries, particularly the beef and sheep industries. The presence of these small farms masks the much higher returns from better performing and larger farms that generate the majority of each industry’s output. The average returns from these better performing and larger farm businesses are frequently compa-

G

$’000

Farm business debt and farm receiptsBroadacre farms

Receipts – farms with debt

Receipts – farms with no debt

Farm business debt – farms with debt

100

150

200

250

300

1997-98

2003-04

1985-86

1991-92

1979-80

H

$’0002003-04

Farm business debtBroadacre farms with debt

Farm business debt

Net farm business debt100

150

200

250

300

2000-01

2003-04

1994-95

1997-98

1991-92

1988-89



rable with investment returns elsewhere in the Australian economy (Carroll 2003).

Table 4 provides average rates of return for broadacre and dairy farms ranked and classifi ed

to classes according to the total capital invested in the farm. Investment returns are shown for three fi nancial years as well as the average return over the period. In addition, the average perfor-

4 Rates of returns for broadacre and dairy farms, by total farm capital Average per farm

Smallest third a Middle third b

2001 2002 2003 Aver- Top 2001 2002 2003 Aver- Top -02 -03 -04 p age 25% d -02 -03 -04 p age 25% dAll broadacre farmsTotal capital value at 30 June $m 0.6 0.7 0.8 0.7 0.7 1.3 1.5 1.7 1.5 1.5

Farm cash income $’000 30 10 13 18 42 74 34 58 55 143Farm business profi t $’000 –10 –39 –27 –25 1 16 –33 –2 –6 75Rate of return e – excluding capital appr. % –0.5 –5.5 –3.4 –3.1 0.9 2.6 –1.2 0.9 0.7 5.9 – including capital appr. % 3.2 2.1 9.3 4.9 11.6 7.4 6.7 11.4 8.5 13.5

Wheat and other cropsFarm cash income $’000 60 9 32 34 110 141 56 131 109 266Rate of return e – excluding capital appr. % 3.8 –5.3 0.3 –0.4 7.5 6.8 0.0 5.4 4.1 12.6 – including capital appr. % 10.4 –0.1 9.1 6.5 10.1 10.1 5.3 16.2 10.5 22.9

Mixed livestock cropsFarm cash income $’000 48 22 36 35 99 47 51 85 61 202Rate of return e – excluding capital appr. % 2.2 –3.7 0.5 –0.4 7.8 1.2 0.2 2.9 1.4 8.7 – including capital appr. % 4.8 7.6 16.1 9.5 14.6 5.3 9.5 16.6 10.5 17.4

SheepFarm cash income $’000 23 10 5 13 57 55 34 39 42 93Rate of return e – excluding capital appr. % –1.0 –6.9 –5.3 –4.4 2.8 0.9 –0.7 0.0 0.1 5.0 – including capital appr. % 2.1 2.9 5.5 3.5 15.1 8.8 10.2 9.7 9.6 11.4

BeefFarm cash income $’000 4 4 1 3 10 33 3 14 17 42Rate of return e – excluding capital appr. % –4.8 –6.3 –5.1 –5.4 –2.8 –1.3 –4.4 –2.1 –2.6 –0.1 – including capital appr. % –1.5 –0.6 10.0 2.6 9.4 2.6 1.6 8.0 4.1 4.5

Sheep–beefFarm cash income $’000 6 11 6 8 30 41 16 7 21 78Rate of return e – excluding capital appr. % –4.4 –5.5 –5.6 –5.2 1.3 –0.6 –2.3 –2.4 –1.8 0.3 – including capital appr. % –1.9 –1.8 6.2 0.8 14.0 3.5 1.4 11.4 5.4 15.7

DairyFarm cash income $’000 64 13 41 39 83 102 36 42 60 143Rate of return e – excluding capital appr. % 3.0 –4.7 –1.1 –0.9 8.8 5.8 –0.6 –0.4 1.6 8.5 – including capital appr. % 8.2 3.0 9.9 7.0 13.6 12.4 11.2 7.3 10.3 15.2

a Less than 0.9 million at 1 July 2001, less than 0.9 million at 1 July 2002 and less than 1.0 million at 1 July 2003. b 0.9 million to 1.7 million at 1 July 2001, 0.9 million to 1.9 million at 1 July 2002 and 1.0 million to 2.0 million at 1 July 2003. d Ranked at regional level by rate of return to capital excluding capital appreciation. e Calculated as farm business profi t plus interest and leasing expenses paid as a percentage of the total value of capital at 1 July. p Preliminary.



mance of the top 25 per cent of farms ranked by their rate of return over the period is shown. This period includes the very high farm income year for most industries, 2001-02, together with the

drought year of 2002-03. Rates of return fl uc-tuate substantially over the period in all indus-tries. All capital classes recorded substantial capital appreciation over the period.

In large part, poorer rates of return for small farms are a consequence of their physical size and resource endowment limiting them to the generation of low farm cash incomes frequently from relatively high priced land because of their proximity to regional centres (amenity based land values). The location of many of these smaller farms may result in relatively high capital gains periodically, but relatively few generate rates of return (excluding capital appreciation) compa-rable with the returns of larger farms.

Generally, larger farms generate higher re-ceipts and have lower costs relative to the amount of capital invested. Consequently, rates of return are higher. Higher receipts and lower costs per unit of capital used also appear to explain why cropping farms within a particular capital class generally generate higher rates of return than livestock farms with a comparable level of invest-ment.

These results are consistent with higher esti-mates of annual productivity growth for larger farms and cropping farms. Estimates of produc-tivity growth in the broadacre and dairy indus-tries, including Knopke et al. (1995) and ABARE (2004) have found higher rates of productivity for grain producing farms than for livestock farms. These studies also indicate that larger farms capture most of the productivity growth in broadacre industries.

Almost two thirds of all new investment in the broadacre industries over the period 1999-2000 to 2002-03 was by the top 25 per cent of farms ranked by rate of return. Rates of new investment on poorly performing and small farms are too small to generate signifi cant productivity gains. The smallest third of farms are capturing very little productivity increase.

An important means of capturing produc-tivity increase is the adoption of more effi cient methods of farming. These practices often re-quire increasing the scale of farming enterprises to capture their advantages. This is diffi cult for small farms that have lesser capacity to generate a fi nancial surplus and that are often located

4 continuedAverage per farm

Largest third c

2001 2002 2003 Aver- Top -02 -03 -04 p age 25% dAll broadacre farms

Capital $m 3.5 4.3 4.8 4.2 4.5

Income $’000 216 105 143 155 374Profi t $’000 133 –18 58 58 289Rate of return e – excl. ca % 5.2 0.7 2.5 2.8 7.4 – incl. ca % 9.9 8.6 10.9 9.8 18.2

Wheat and other cropsIncome $’000 303 202 312 273 518Rate of return e – excl. ca % 8.1 2.5 6.3 5.6 14.5 – incl. ca % 11.9 7.9 13.1 11.0 21.5

Mixed livestock cropsIncome $’000 236 115 156 169 435Rate of return e – excl. ca % 5.9 1.2 2.8 3.3 9.2 – incl. ca % 11.2 8.4 12.4 10.7 23.0

SheepIncome $’000 108 68 55 77 225Rate of return e – excl. ca % 2.1 0.1 1.0 1.0 5.6 – incl. ca % 4.6 9.1 12.1 8.6 18.4

BeefIncome $’000 214 88 102 135 421Rate of return e – excl. ca % 4.0 –0.1 0.9 1.6 6.0 – incl. ca % 9.1 10.3 7.7 9.0 15.2

Sheep–beefIncome $’000 144 42 61 82 211Rate of return e – excl. ca % 3.0 –0.2 1.3 1.4 4.8 – incl. ca % 9.8 7.8 12.0 9.9 19.1

DairyIncome $’000 180 53 94 109 218Rate of return e – excl. ca % 6.1 0.0 1.6 2.6 7.6 – incl. ca % 10.2 5.5 10.3 8.7 14.9

c More than 1.7 million at 1 July 2001, more than 1.9 million at 1 July 2002 and more than 2.0 million at 1 July 2003. d Ranked at regional level by rate of return to capital excluding capital appreciation. e Refer to footnotes to the left. p Preliminary.



in areas where high land values render land purchase a poor business option.

A range of other characteristics has been found to be associated with better performing farms. These characteristics are broadly indica-tive of a more intense focus on farm business improvement and include: the farms that are generally operated by owner managers who are more likely to be members of production groups and Landcare groups (Mues et al. 1998; Riley et al. 2002) owner managers seek information for decision making more widely and more from professional advisors; owner managers report less aversion to risk (Riley et al. 2002); use more risk management tools including forward sales and futures (ABARE 2004); use methods of sale of farm products that ensure that they receive clear market and price signals, enabling them to modify their production system (for example over the hooks sale of livestock); and, in some analyses (ABARE 1998) but not all, use better natural resource management practices.

Drought assistanceGovernment policy in Australia embodies the principle that farmers should be responsible for the management of their farm business and associated risks such as drought. Accordingly, farmers have been encouraged and assisted to improve farm fi nancial and land use plan-ning including risk management, particularly through the Australian Government’s Agri-culture Advancing Australia (AAA) program. This program also includes a mechanism to build cash reserves for use during drought and other downturns through the Farm Manage-ment Deposit scheme introduced in 1999-2000. In addition, federal, state and territory govern-ments responded to the 2002-03 drought with a range of measures targeting farm business and the welfare needs of farming families.

Commonwealth assistance during recent drought events has been mainly based on the declaration of ‘exceptional circumstances’ (EC) on a region by region basis.

Farmers in EC declared areas are eligible to apply for welfare assistance (termed Exceptional Circumstances Relief Payment and equivalent to Newstart welfare available to all Australians

except that farm assets are excluded from eligi-bility tests) as well as business assistance. Busi-ness assistance is offered in the form of 50 per cent interest subsidies on new and existing loans up to a maximum of $100 000 in any twelve month period, with a cumulative maximum of $300 000 over the previous fi ve years.

ABARE survey data for 2002-03 and 2003-04 for farms in areas declared for exceptional circumstances assistance at 30 June 2004 (map 2) have been used to document the amount of various forms of drought assistance received by farm businesses and farm households, the impact of this assistance on the farm and farm household’s fi nancial position and some of the physical change in farm enterprises.

Assistance provided through the exceptional circumstances program targets two types of farms: those that have debt, in the case of busi-ness assistance, and those that have low income and low liquid assets, in the case of the excep-tional circumstances relief payment. Access to assistance is provided for all farmers who meet these criteria regardless of differences in the ex-tent to which individual farmers may have pre-pared for drought through production and fi n-ancial management strategies such as farm man-agement deposits.

Farms with low or no debt, using conservative management and with relatively high levels of liquid assets receive much less assistance (tables 5 and 6). On average farms in EC declared areas

Exceptional circumstances declared or interim declared areas at 30 June 20042



that had no debt during the period 2002-03 to 2003-04 received a total of $1300 in business assistance and $2300 in assistance to the farm owner manager’s household for the period. In contrast, farms with debt receiving the business

interest subsidy received a total of $23 100 in business assistance and $16 400 in assistance to the farm owner manager’s household.

The data presented appears to indicate that in-creases in farm management deposits resulted

5 Business assistance to farms in areas declared for exceptional circumstances a Broadacre and dairy farms Average per farm for farms in sample in both 2002-03 and 2003-04

Farms with debt Farms receiving but not in receipt of Farms with interest subsidy b interest subsidy b no debt

2002-03 2003-04 2002-03 2003-04 2002-03 2003-04PhysicalArea of land operated 30 June ha 4 200 (18) 4 200 3 000 (22) 3 000 1 900 (38) 1 900Wheat yield sown t/ha 0.7 (27) 1.6 0.8 (9) 1.9 0.7 (15) 1.5Sheep at 1 July no. 1 500 (20) 1 200 1 400 (11) 1 200 1 000 (29) 800Beef cattle at 1 July no. 137 (14) 119 192 (41) 172 169 (135) 148Change in livestock numbers during year – sheep % –23 (24) 2 –15 (17) 6 –14 (71) 5 – beef % –18 (41) 11 –7 (62) 3 –11 (80) 13

Farm businessInterest subsidy $ 4 900 (32) 11 700 0 0 0 0Other government business assistance c $ 4 700 (17) 1 800 1 700 (18) 1 600 200 (109) 1 100

Farm cash income $ 26 600 (63) 50 300 26 800 (47) 48 800 50 300 (46) 44 800Share of farms with negative farm cash income % 53 (22) 28 43 (8) 29 24 (30) 10Farm business profi t $ –84 400 (21) –7 100 –64 800 (37) –8 200 –19 700 (64) 4 000

Farm debt at 1 July $ 358 600 (12) 407 700 201 600 (8) 236 900 0 0Farm debt at 30 June $ 407 700 (12) 427 500 236 900 (8) 247 500 0 0Change in debt % 14 (12) 5 18 (8) 4Net assets at 30 June $ 1 629 700 (9) 1 661 700 1 792 600 (12) 1 812 900 1 553 500 (52) 1 624 800Equity ratio at 30 June % 79 (3) 79 88 (2) 87 100 (0) 100

Bank deposits shares in public companies, etc at 30 June $ 48 100 (24) 61 700 81 000 (14) 104 300 162 300 (43) 181 500Farm management deposits at 30 June $ 12 300 (65) 5 300 21 600 (19) 17 700 5 800 (113) 15 500Farm management deposits at 1 July $ 5 300 (49) 8 000 17 700 (43) 25 100 15 500 (91) 6 900

Nonfarm income of farm owner manager and spouseECRP d $ 5 700 (26) 10 700 1 200 (22) 3 100 1 000 (47) 1 300Total off-farm income $ 21 900 (14) 27 000 27 600 (9) 29 900 25 500 (37) 22 500

Farms not expecting to be profi table over the majority of the next 5 years e % 8 14 20

Sample Contributing no. 92 269 53

a Areas declared as at 30 June 2004. b In either 2002-03 or 2003-04. c Includes freight subsidies, water subsidies and state based assistance such as the Victorian Farm Business Support Grant etc. d Exceptional Circumstances Relief Payment. e Self assessment by farm owner manager.



where substantial government assistance was provided. However, while some farms may have increased their farm management deposit holdings because of their access to government assistance payments, it appears that the majority of broadacre and dairy farms increased their deposits as a consequence of the sale of livestock. Many of these farms subsequently reduced their deposits in 2003-04, although relatively few indicated that funds were specifi cally applied to the purchase of livestock. This may have been

because many deemed livestock purchase to be too expensive an option and expanding cropping provided a more immediate increase in cash fl ow.

As part of the 2004 ABARE surveys, owner managers were asked if they believed their farm was likely to be profi table over most of the next fi ve years. This question was intended to provide an indication of farm viability. The majority of farms identifi ed by their owner managers as being unlikely to be profi table in the medium term were

6 Household assistance to farms in areas declared for exceptional circumstances a Broadacre and dairy farms Average per farm for farms in sample in both 2002-03 and 2003-04

Farms receiving Farms not receiving exceptional circum- exceptional circumstances relief payment b stances relief payment b

2002-03 2003-04 2002-03 2003-04PhysicalArea of land operated 30 June ha 3 200 (27) 3 200 2 900 (13) 2 900Wheat yield sown t/ha 0.5 (25) 1.5 0.9 (8) 1.9Sheep numbers at 1 July no 1 100 (20) 900 1 500 (10) 1 200Beef cattle numbers at 1 July no 109 (22) 94 214 (18) 193Change in livestock numbers during year – sheep % –19 (36) 7 –15 (20) 5 – beef cattle numbers % –17 (66) 1 –7 (54) 6

Farm businessInterest subsidy $ 1 300 (36) 3 100 200 (93) 600Other government business assistance c $ 4 100 (16) 2 500 800 (22) 1 100

Farm cash income $ 0 (999) 37 100 44 700 (17) 53 400Share of farms with negative farm cash income % 50 (15) 19 36 (11) 29Farm business profi t $ –91 900 (13) –21 200 –44 900 (18) 900

Farm debt at 1 July $ 212 500 (10) 238 400 179 500 (10) 208 500Farm debt at 30 June $ 238 400 (10) 251 600 208 500 (10) 217 000Change in debt % 12 (10) 6 16 (10) 4Net assets at 30 June $ 1 348 000 (10) 1 362 300 1 908 700 (10) 1 946 100Equity ratio at 30 June % 84 (2) 84 90 (1) 89

Bank deposits, shares and other liquid assets at 30 June $ 38 100 (15) 49 800 114 600 (12) 140 500Farm management deposits at 30 June $ 4 500 (50) 5 400 23 900 (15) 20 300Farm management deposits at 1 July $ 5 400 (50) 7 600 20 300 (32) 26 500

Nonfarm income of farm owner manager and spouseECRP d $ 5 500 (13) 11 900 0 0Total off-farm income $ 17 500 (12) 24 000 30 700 (10) 30 000

Farms not expecting to be profi table over the majority of the next 5 years e % 18 13

Sample contributing no 138 276

a Areas declared as at 30 June 2004. b In either 2002-03 or 2003-04. c Includes freight subsidies, water subsidies and state based assistance such as the Victorian Farm Business Support Grant etc. d Exceptional Circumstances Relief Payment. e Self assessment by farm owner manager.



found to either have not received business assis-tance from the EC program or to have received mainly household assistance. In contrast, other government business assistance (non-EC assis-tance) was more widely dispersed.

Use of farm management depositsFarm management deposits were introduced by the Australian Government as a cash and risk management tool for Australia’s primary producers. Farm management deposits allow farmers to set aside pre-tax primary production income so they can balance their income between good and bad times. Tax benefi ts normally accrue if the deposits are held for a minimum of twelve months, but from December 2002 farmers in exceptional circumstances declared areas have been able to withdraw deposits within twelve months and still be eligible for tax benefi ts. Farm management deposits help to manage exposure to adverse economic events and seasonal fl uc-tuations.

Aggregate statistics on the use of farm man-agement deposits published by the Department of Agriculture, Fisheries and Forestry, indicate that deposits grew steadily until June 2002 when a huge infl ux of deposits at the close of the 2001-02 fi nancial year boosted deposits by almost $1 billion from the previous June to just over 2 billion dollars (fi gure I).

Incomes for many farms in 2001-02 were at record levels, but widespread drought during 2002-03, sharply reduced incomes. Neverthe-less, deposits increased to $2.5 billion by June 2003 in 42 877 farm management deposit ac-counts. ABARE survey information suggests that just over 70 per cent of deposits held dur-ing this period were likely to have been from farms in EC declared areas. This period was character-ised by a substantial level of both withdrawals and deposits, with the provision of early access to deposits in EC areas contributing to this increase. Deposits further increased, but by just $0.1 bil-lion in 2003-04 to $2.6 billion by June 2004 and the number of accounts increased to 43 309.

Because most farms have more than one individual with a share in the farm’s income, the number of farms with deposits is substan-tially less than the number of deposit holders.

ABARE farm surveys indicate that around 25 per cent of broadacre farms held farm manage-ment deposits at 30 June 2004 and around 15 per cent of dairy farms. The proportion of broadacre farms with deposits has grown from 15 per cent to 25 per cent in the past two fi nancial years, but the average holding per farm has grown much more slowly. At 30 June 2004, the majority of deposits were relatively small, with around 40 per cent of the farms having farm management deposit holdings of less than $50 000. Neverthe-less, around 17 per cent of farms have deposits of more than $200 000.

The Farm Management Deposit scheme acts indirectly as a mechanism to smooth farm busi-ness income through the deposits made by indi-vidual partners in the farm fi rm. Quarterly statis-tics of deposits over the course of the schemes operation suggest that tax issues have been a more dominant consideration than smoothing the cash fl ow of farm businesses. Despite the normal requirement that deposits must be held for twelve months before withdrawal to attract taxation benefi ts, over 80 per cent of the net additions to farm management deposits occur between March and June each year. For the remainder of the year holdings remain relatively constant.

Farms with farm management depositsAccording to ABARE’s broadacre farm survey data, farms with farm management deposits are larger in terms of their enterprise scale and

Farm management deposits and number of account holdersI

Number of accounts

Quarterly, ended June 2004

Value held

1999June June June June June June

2000 2001 2002 2003 2004

$m

500

1000

1500

2000

2500

’000

10

20

30

40



more profi table than farms that do not hold farm management deposits.

On average, farms holding farm management deposits have higher farm cash income, higher net assets and higher rates of return. However, they also have higher debt levels and, in 2002-03 and 2003-04, received more government assistance payments than farms without farm management deposits. Farms with such deposits also have lower off farm income, consistent with the criteria that only producers with less than $50 000 of off-farm income are eligible for farm management deposits. Interestingly, a higher proportion of younger farmers (less than 40 years of age) hold such deposits, but on average their holdings are small compared to those of older farmers.

For some farms without such deposits, poorer fi nancial performance is a consequence of ad-verse production conditions in recent years. However, generally farms without farm manage-ment deposits are smaller in terms of their overall scale and likely to generate only small cash surpluses after replacing essential capital and meeting family living expenses. Their capacity to accumulate signifi cant deposits over an extended period of years is limited.

Withdrawals of farm management depositsDuring 2003-04, the percentage of farms that held farm management deposits remained the same in the pastoral zone. However, in the high rainfall and wheat–sheep zones the percentage of farms with farm management deposits increased from 19 per cent to 21 per cent and from 19 per cent to 26 per cent respectively. Despite this increase, the high rainfall zone continues to have the lowest percentage of farms with such deposits, refl ecting the generally smaller size of farms in this zone and higher off-farm incomes. In the pastoral and wheat–sheep zones, 30 per cent and 26 per cent of farms respectively hold farm management deposits.

While the number of broadacre and dairy farms with farm management deposits increased during 2003-04, among the farms that already had deposits at the beginning of 2003-04, almost twice as many farms reduced their deposits as farms that increased their deposits (table 7).

Farms withdrawing farm management de-posits in 2003-04 had lower farm incomes and relatively high farm management deposits, on average (table 7). In order to gain some insight into the uses of funds withdrawn from farm management deposits, farmers participating in 2004 ABARE surveys were asked to specify how they used money withdrawn from farm manage-ment deposit accounts in 2003-04. Farmers were able to record several responses if funds were used for more than one purpose.

Funds were applied to a range of farm busi-ness and household uses, with the most common

7 Characteristics of farms, by change in farm management deposits, 2003-04

Average per farm

Farm management deposits

Rising Falling

Farm management deposits – at 1 July $’000 61 (11) 114 (9) – at 30 June $’000 125 (8) 83 (12)

Government assistance payments $’000 1 (44) 3 (25)

Total cash receipts $’000 462 (10) 397 (8)less total cash costs $’000 279 (13) 290 (8)Farm cash income $’000 183 (10) 107 (16)

Farms with negative farm cash income % 9 (36) 22 (16)Farm business profi t $’000 112 (16) 34 (45)Net capital additions $’000 39 (49) 127 (34)Off-farm income of owner manager and spouse $’000 14 (34) 19 (19)

Rate of return – excl. capital appr. % 5.0 (13) 2.3 (25) – incl. capital appr. % 17.7 (12) 9.7 (13)

Age of owner manager yrs 45 (5) 48 (5)

Farm capital at 1 July $’000 2 721 (10) 2 785 (6)Farm debt at 30 June $’000 258 (20) 280 (15)Liquid assets $’000 128 (17) 136 (20)Equity ratio at 30 June % 92 (1) 91 (1)

Number of farms ’000 7 13

Note: Figures in parentheses are standard errors expressed as a percentage of the estimates provided.



uses being to make interest or loan repayments, followed by general farm operating expenses, then household expenses and feed for livestock (table 8).

There was signifi cant variation in use across agricultural zones. In the pastoral zone, 44 per cent of farms reported using the withdrawn funds to purchase feed for livestock. Also, a third used funds for household expenses. In part, these responses refl ect the prolonging of drought in many pastoral areas until 2004.

The majority of farmers withdrawing their funds were in the wheat–sheep zone. Here far-mers mainly used the money for general, unspec-ifi ed operating expenses or to repay interest or loans. Only 6 per cent of farms used the money to purchase feed for livestock.

Farms in the high rainfall zone, where farms are generally smaller frequently spent withdrawn money on food and household expenses or feed

for stock. A signifi cant proportion also used the money for holidays or personal expenses.

ReferencesABARE 1998, Australian Grains Industry 1998,

Report of the Australian Agricultural and Grazing Industries Survey of Grain Producing Farms, Canberra.

—— 2004a, Australian Beef: Productivity, Aus-tralian Beef 04.2, Canberra, November.

—— 2004b, Australian Beef Industry: Produc-tion and Sale of Beef Cattle, Australian Beef 04.3, Canberra, December.

Barr, N. 2002, Going on the land and getting off: farm incomes and farm adjustment, Paper presented at the Preconference workshop ‘Rural Livelihoods and Adjustment’, Austra-lian Agricultural and Resource Economics Society, Canberra, February.

Carroll, M. 2003, Creating wealth in Agricul-ture, Paper presented at the Outlook 2003 Conference, Canberra, March.

Connell, P., Hooper, S. and Helali, S. 2002, Australian Prime Lamb Industry 2002, Report of the Australian Agricultural and Grazing Industries Survey of Prime Lamb Producers, ABARE Research Report 02.3, Canberra.

Knopke, P., Strappazzon, L. and Mullen, J. 1995, ‘Productivity growth: total factor productivity on Australian broadacre farms’, Australian Commodities, vol. 2, no. 4, pp. 486–97.

Martin, P., Hooper, S., Riley, D., Tok, J. and Helali, S. 2002, ‘Farm performance 2001-02’, Australian Commodities, vol. 9, no. 1, March quarter, pp. 209–25.

Mues, C., Chapman, L. and Van Hilst, R. 1998, Promoting Improved Land Management Practices on Australian Farms: A Survey of Landcare and Land Management Related Programs, ABARE Research Report 98.4, Canberra.

Riley, D., Gleeson, T., Martin, P., Hooper, S. and Shafron, W. 2002, Australian Beef Industry 2002, Report of the Australian Agricul-tural and Grazing Industries Survey of Beef Producers, Research Report 02.4, Canberra.

8 Use of funds withdrawn from farm management deposits, 2003-04

Broadacre and dairy farms

Farms withdrawing deposits

%

Loan/interest repayments 23.4 (20)General operating expenses 21.4 (19)Purchase food and other household items 18.2 (19)Purchase feed for stock 16.5 (14)Purchase seed, fertiliser or chemicals 15.0 (38)Holidays or other personal expenses 13.0 (39)Off-farm investment 13.0 (33)Fund farm improvements 10.2 (51)Purchase livestock 9.8 (51)Purchase land 7.0 (35)Purchase equipment 6.5 (39)Partnership change/retirement 3.0 (69)School fees and expenses 2.8 (71)Employees wages 2.7 (52)Superannuation 2.5 (59)Taxation Payments 2.1 (41)Purchase water 0.9 (81)Agistment 0.4 (67)

Note: Funds may be used for more than one purpose so categories add to more than 100 per cent. Figures in parentheses are standard errors expressed as a percentage of the estimate provided.

The role of financial institutions in rural adjustment

ABARE Outlook – March 2005 1.0 Rural Adjustment When we talk about “Rural Adjustment” we are talking about family businesses “adjusting” to a changing business environment.

- An environment where margins are squeezed by commodity prices not appreciating at the same rate as inflation and farm inputs, and

- an environment where global markets change the profit margins that can be

made on various agricultural produce. The outcome is consolidation of agricultural production into the hands of a smaller number of farmers. Over the last decade the number of small farms1 has declined by over 20% while the number of large farms2 has increased by over 148%.

Enterprise Segmentation 1987 to 2003All Enterprises

Year >500k $200-500k $22 - 200k <22K Total

1993 5,671 22,005 83,680 30,000 141,356

1994 6,793 24,003 85,629 29,836 146,261

1995 7,068 23,586 83,882 28,964 143,500

1996 9,310 26,665 79,539 27,688 143,202

1997 10,954 28,256 75,059 27,862 142,131

1998 13,132 27,892 73,512 25,921 140,457

1999 12,136 27,426 70,744 33,102 143,408

2000 12,616 28,299 75,916 27,728 144,559

2001 13,087 28,540 71,852 25,437 138,916

2002 14,416 27,944 66,127 25,381 133,868

2003 14,075 29,081 66,857 21,595 131,608

148% 32% -20% -28% -7%

Source: ABS Analysis: Neil Clark & Associates What does this mean for agriculture, what does it mean for the families involved in agriculture, what does it mean for rural communities and what does it mean for service providers such as banks? These are some of the questions I will address. Firstly lets look at the causes of Rural Adjustment Consolidation is caused by a combination of factors. There are pressures on some families to leave their farm, the optimal size for a farm is increasing and there are significant entry costs for those wanting to get into farming.

1 Small Farms assumes turnover less than $200,000. 2 Large Farms assume turnover greater than $500,000.

1. A long run trend of declining margins and the inability of many farmers to find offsetting productivity gains (or alternatively sources of supplementary off farm income) causes many farms to become unviable – particularly smaller, less efficient farms producing commodities under prolonged price pressure or who have suffered successive adverse seasons;

2. Equitable intergenerational transfer means a typical family farm must

increase its asset base and the “real” profit generated by 2 or 3 times every 30 to 40 years;

3. The large equity requirement of traditional farming enterprises is out of

reach of many aspiring young farmers. The minimum capital cost is around $1.5 million and with a relatively low cash return only limited debt can be serviced;

4. The inability of most independent managers and investors to match the

performance of owner operators, along with very few ventures being structured for investment, limits access to investment capital; – Indeed most of the $120 billion invested in agriculture is “old” money in that it has come from the same families for several generations.

With none of these factors, or their underlying drivers, looking like abating in the future we can expect “adjustment” to be an enduring characteristic of agriculture. 2.0 Is consolidation a good or a bad thing for agriculture? Agriculture’s contribution to the economy continues to grow. Over the last decade the Gross and Net Value of Agricultural Production has increased by 4.5% p.a. and 7.9% p.a..3

Value of Farm Production

0

10,000

20,000

30,000

40,000

1993/94

1994/95

1995/96

1996/97

1997/98

1998/99

1999/00

2000/01

2001/02

2002/03

2003/04

2004/05f

GVP

CAGR =

4.5%

NVP

CAGR =

7.9%

3 Over the same period production has risen by almost 2½% on average p.a. and farm costs have increased by 3½% p.a..

However, with a decreasing number of farms the average gross and net value of production per farm has increased by 5.1% p.a. and 8.5% p.a. over the last decade. So we are seeing a decreasing number of farms contribute an increasing value of production.

Average Value of Farm Production

0

100

200

300

400

1993/94

1994/95

1995/96

1996/97

1997/98

1998/99

1999/00

2000/01

2001/02

2002/03

2003/04

2004/05f

GVP per

farm

CAGR =

5.1%

NVP per

farm

CAGR =

8.5%

As consolidation occurs, the assets and resources currently being managed by the less productive farmers generally transfer to the more productive farmers. This transfer or adjustment helps Australia’s agriculture to maintain its global competitiveness. 3.0 Characteristics of the most productive and successful farms My observation is that the strongest farms are characterised by: 1. They are on average larger and often stretching their resources to grow –

scale allows them to reduce their fixed costs relative to their revenue and their ambitions to grow extend them,

2. They seek new ideas and outside advise from a wide range of sources - they

have inquisitive minds and are receptive to new ideas and looking for new approaches,

3. They embrace new technology but do so judiciously – by judiciously I mean

they’re not at the “bleeding edge”; they test it and watch others experiences and when confident of its value are quick to adopt it. The same applies to new industries,

4. They don’t do things out of habit or tradition – if another product and market

is proving to be more profitable then they change, and if some one else can do something more cost effectively then they will outsource the activity,

5. They understand the key value drivers of their business and focus their

energy on the things that really make a difference – more often than not this

is their cost of production which they keep low. They also know their market’s requirements and produce to its specifications,

6. They take calculated risks – risks that many may not be prepared to take but

always on an informed basis with an appreciation of the downside and usually with a fall back strategy.

And despite the concerns expressed about the less productive farms being taken over by “corporates” the majority of the most successful farms are family owned and employing two or three generations of the family4 in the business. The most productive businesses need the less efficient farmers to release their assets so they can reduce their unit overhead costs and expand their businesses to provide an equitable intergenerational transfer of a viable business. 4.0 Rural Adjustment – the ramifications for those that are struggling When you think about the phenomena that “Rural Adjustment” describes it is an inappropriately dispassionate word. The adjustment process invariably involves family members suffering enormous emotional and physical stress as they battle to retain the family farm and home. It is not hard to see how these farm businesses become trapped in a rut. Their financial resources are stretched to just make ends meet and farming can be a very insular occupation with the physical demands of animal or crop husbandry leaving little time to lift yourself out of the day to day to get things into perspective. Thus, the importance of Rural Counselling services. However this is not unique to Agriculture. Many other businesses that have traditionally been owned and operated by families are subject to similar pressures5. Family owned stores struggle against the Supermarkets, small hardware businesses are giving way to large category killers, and many country newspapers have been taken over by large media companies, just to give some examples. While the adjustment process may end a family heritage, many farming families have the opportunity to leave with significant equity so long as they don’t leave it too late. Equity that if sensibly invested can earn more than it earned in the farm. Ironically it is the success of the most profitable farms that underwrites farm asset values.

4 It is this that makes the statistics on the average age of farmers quite meaningless as they use the age of the oldest generation involved in the business and ignore the younger generations 5 Drought is the same. Usually farmers receive special treatment while contractors, transport operators and agricultural supply merchants who are often even more severely affected are ignored.

Family farm consolidation gets special attention – perhaps because the farm is also their home, because of the iconic role the “Battler” farmer played in Australia’s development, concerns about the ramifications of depopulating inland Australia, and farmer’s still significant (albeit declining) political voice. While Rural Adjustment is very emotive issue, adjustment is a phenomenon that family businesses in a wide range of industries have to confront. 5.0 Ramifications for country communities While consolidation is arguably healthy for agriculture it is clearly not good for country communities as we know them. The ongoing migration of country people to larger regional hubs and the coast is making it difficult to sustain small country towns that depend on servicing the farm sector.6 Adding to this is the paradox of the many members of small country communities who avail of the great choice and more competitively priced goods and services that larger centres offer also contributes to the decline. An example of this is the support for Rabobank who with an office network a fraction of the size of the major bank’s branch networks has now become the second largest provider of agricultural finance. While Banks have been very publicly criticised for closing branches there has been even greater contraction of government representation. Even not for profit organisations have contracted their country representation. My personal view is that we need our thinking on what it is that defines a country community to evolve. The number of Mechanic’s Institute halls that are either vacant or being used for something other than its original purpose is evidence that this is something we have moved on from, while the number of Land Care groups is evidence that this network is very contemporary. Perhaps communities should be more about networks of people with common interests and causes rather than traditional physical structures. 6.0 The evolution of Agricultural banking In the early 1980’s the Australian banking system deregulated and this gave banks the freedom to pursue very different business strategies and opened the market to foreign banks, to new banking licenses, privatisation of government banks and mergers of the smaller banks. The Agricultural finance market is very attractive in that over the last decade it has grown at an average rate of 9% p.a. while the broader business credit system has averaged 7.5%. This has attracted new entrants and today half of

6 Some have been fortunate in finding a natural advantage in another industry such as an aspect of tourism.

the top eight providers of finance to agriculture did not exist a decade ago. Refer to the box – “Banking on the future of farming”. Deregulation has had the desired effect of competition reducing the cost of financial services. Over the last decade interest margins and fees as a proportion of loans have reduced by 36%; a reduction which saves the four major bank’s business and personal customers in the order of $21.8 billion p.a.. This is the benefit from banks adopting technology, improving their productivity and reducing employee and outlet numbers. While the same data is not available just for agricultural finance, I do know that in the four and a half years since the National’s Agribusiness division was established, its margins and fees as a proportion of loan balances have contracted at an almost identical rate to the above series. The interest in agricultural finance is also evident in the number of new products developed specifically for the agricultural sector:

• Farm Management Deposits • Dairy Adjustment Loans • Harvest Advances • Water Mortgages

These products complement stock mortgages and crop credit which have been around for sometime and recently reinvigorated to varying degrees. Agriculture is now serviced by a group of very competitive finance providers from very different backgrounds pursuing very different strategies seeking to offer the sector greater value as efficiently as possible. 7.0 The role of banks in a consolidating sector Rather than talk generally about the role of banks in the adjustment process lets focus on the two ends of the spectrum - those farmers under pressure to leave the industry and those with the resources to expand. a. Protecting the unviable farms from losing their wealth For family farms who are struggling to remain viable, financial institutions can play an important role in early identification of equity erosion. A significant proportion of family farms in this position are not very skilled in financial management. Reviewing the financial health of their business with a bank manager, particularly someone who understands their industry and business and who has some empathy with their predicament, can be enormously beneficial. Many a time a bank manager’s review has triggered actions which have saved a business or at least preserved the family’s wealth.

The risk is that competition would cause further cost reductions and finance providers find it more cost effective to simply rely on security cover rather than take the time to test borrowers ability to service debt. b. Supporting those with the resources to expand their businesses For those who have the resources to grow, financial institutions have a role to play in funding their expansion plans. Indeed this is the most competitive part of the Agricultural Finance market. It is attractive for finance providers as it offers valuable relationships that grow. It is far more cost effective and less risky for a bank to fund the growth of a customer that it knows than it is to grow through the acquisition of new clients. However as these businesses are often very complex and more highly geared they require bankers and credit departments who understand their industry and business strategies and the potential risks. Some examples of the complexity include vertical integration along the value chain, trade offs between transfer pricing and shareholder returns, multiple enterprises, multiple legal entities and multiple share holdings, joint ventures and the security offered might be inventory, receivables, contracts, licenses or rights. Dealing with these types of agricultural enterprises requires a very different set of skills to dealing with the former group. 8.0 Concluding comments: With none of the causes of consolidation looking like abating in the future we can expect “adjustment” to be a enduring characteristic of agriculture. As consolidation occurs, the assets and resources currently being managed by the less productive farmers generally transfer to the more productive farmers. The most productive businesses need the less efficient farmers to release their assets so they can reduce their unit overhead costs and expand their businesses to provide an equitable intergenerational transfer of a viable business. This transfer or adjustment helps Australia’s agriculture to maintain its global competitiveness. While Rural Adjustment is a very emotive issue, adjustment is a phenomenon that family businesses in a wide range of industries have to confront. Whether consolidation is a good or bad thing, probably distils down to whether we want to increase the value of agricultural production or whether we want to protect traditional communities. Agriculture is now serviced by a group of very competitive finance providers from very different backgrounds pursuing very different strategies seeking to offer the sector greater value as efficiently as possible.

Banking on the future of farming Significant milestones in the evolution of Agricultural banking include:

• The entry of the Dutch bank, Rabobank into Australia and its subsequent acquisition of PIBA. Rabo is now the second largest provider of finance to Agriculture,

• The formation of Suncorp through the merger of Suncorp, Metway

Building Society and the Queensland Industry Development Corporation. Suncorp is now the sixth largest provider of finance to Agriculture,

• The formation of a joint venture between Bendigo Bank and Elders

creating Elders Rural Bank, the seventh and fastest growing provider of finance to Agriculture,

• The corporatisation of the Australian Wheat Board and its later acquisition

of Landmark. Corporatisation enabled limited competition in the harvest finance market and the combined entities have a broad range of financial services capabilities.

It took some time for change to gain momentum in the Agricultural finance activity of the majors, however now we are seeing a quite divergent array of strategies being pursued. Their internal reporting lines have been aligned to heighten their focus on agriculture and the country:

• National has established a business unit focused solely on agriculture • ANZ and Westpac have established country divisions of which agricultural

finance represents a significant proportion of the activity and value. Banks are also exploring different loan origination and service approaches:

• ANZ is selling country banking franchises with a focus on Agribusiness, • Westpac has centralised management of smaller accounts to state call

centres and set up “in-store” partnerships, • National and CBA have established alliances with Australia Post, • Rabo uses AWB-Lankmark to originate a large proportion of its loans, and • A number including ANZ, Suncorp and BankWest pay brokers to find and

service loans for them.

ABARE – OUTLOOK CONFERENCE – 1 MARCH 2005 – CANBERRA

“MANAGING RISK AT THE FARM LEVEL”

BY: GRAHAM PEART – AGRICULTURAL CONSULTANT

McDONALD PORTER HASSALL & CO

P O BOX 1052

DUBBO NSW 2830

INTRODUCTION: In the great lottery of life, there are numerous risks and hazards during an average life expectancy of 84 years. Risks and hazards will occur and, to survive and prosper, you need to assess the risks and plan to minimise their impact where possible. I once asked a successful elderly farmer what his drought management policy was and he said “A lot of money in the bank”. That’s all very well at the end of your career but I know he lived much more dangerously as a young farmer. If your aims in farming are to produce good annual cash flow surpluses and accumulate wealth over time then there are many forces working against you. Each risk needs to be understood and quantified (value x probability) and then enjoyed, destroyed or modified. Many risks are inherent to agriculture so if you don’t plan for droughts you don’t understand Australian agriculture. Planning your own management of the challenges is the area that makes for success or failure. RISK SOURCES

1. PRODUCTION OUTPUT RISK

All factors affecting the volume and quality of production will affect budgeted income. The first step is to base the budget on sound expectations taking in the known risk factors. Climate in all its variables is a major factor: rain, hail, snow, storms, sunlight hours, drought, waterlogging, wind. The timing of weather events is also critical. Experienced enterprise managers know the key production variables and prioritise their efforts accordingly.

Each production cycle for crops, pastures, stock, vegetables or trees must be planned

well ahead and risks at all stages can be reduced by: -

- Top planned management - timely operations - use of expert advice at all stages - appropriate best technology - use of contractors - spreading climatic risk - strategic feeding of animals - feed lotting to meet markets - planned exit strategies - insurance against hail & fire - use of short and long term weather forecasts to guide actions - monitoring and responding early to new information

2. PRICE RISKS

Farm investment production cycles are often very long and vary from months to years eg lettuce, wheat, cotton, sheep, cattle, horticultural tree crops, timber. Each enterprise requires varying investments of specific enterprise machinery and fixed capital eg vegetable planters, shearing sheds, lazer levelled irrigation land, trees.

On the other hand, price cycles and price variability are affected by short and long term supply and demand factors, inflation, and the value of the $A.

The choices on price are to accept the spot price at harvest and assume minimum dollar variation; or use one of the many instruments for locking in the product price and dollar value before planting or harvest. All of these price fixing instruments cost money and involve risks of their own.

Each enterprise marketing plan must include a well researched price estimate for the quality of product planned and this then goes into the budget. Price variations away from this budget estimate may be reduced by:-

- storage and sale over an extended period eg wool & wheat - forward selling with added risks with non delivery - futures contracts either physical or paper where you pit yourself in a once a

year trade against a constantly adjusting market with hourly new information for professional traders & speculators

- currency contracts: do you cover both upside and downside risk? - bid and offer boards allow you to set your own floor price and then adjust to

the real market - long term contracts can work but price setting is difficult - del credaire insurance only exists for agents to protect against non-payment - cultivate top relationships with your buyers by producing what they want; on

time; every time - Cash selling – better an average cash price than a higher non-paid promise - The greatest price risk is not being paid at all!!

3. PEOPLE

Every enterprise relies on people to perform and persevere in their job. Every production cycle requires a number of people with very different skills and education to co-operate to produce to plan a given amount and quality of product at a given cost and sell it at a price that generates at least a market reward for those contributing land, labour and capital. The overall manager of the enterprise needs to plan the production cycle to perform at or above a set of agreed benchmarks. To get good to excellent timely performance from all members of the team requires relationship management to ensure the expectations of all parties are met. The level of enterprise risk varies greatly depending on who in the team doesn’t perform or persist in their job.

Partners (especially marriage partners) leaving may take away approximately 50% of the capital base and possibly a key worker. Focus on key relationships.

Communication with the team to garner the best information and gain a commitment from each team member to the planned production and reward system is essential to ongoing performance.

Plan for people replacement; from the CEO to the tea laddy, both short and long term. Plan for sickness, varying incapacity, resignations and deaths

Plan a human resource management program.

Plan to meet OH&S requirements both legal and beyond. Plan insurance to cover key people in the team.

Plan contractors or temporary staff to fill gaps in management and labour.

Concentrate on trained/motivated staff who do the job and look for new opportunities to do it better. Plan two weeks new training per staff member per year.

Lock key staff in with golden handcuffs where possible.

Detailed employment contracts, like pre-nuptial agreements, at least set out the expectations of both parties. Job security helps long term planning for both parties. The task of “The Board” is to formulate policy, approve operating plans and budgets and then support or replace the CEO. The CEO should be the servant of the Board and preferably never an MD who can vote on or control the Board.

4. PESTILENCE

The biology of agricultural leaves your investment open to the risk of previously unknown or rarely occurring plant and animal diseases or insect, predator or weed introductions. Some can have immediate and disastrous effects on production or markets, others have slow long term build-up effects. Recognising and understanding the pest is the first essential and then early warnings and adequate action to eliminate, contain or manage the resulting potential loss. Some examples:

- Mad cow disease – an excellent disease for other people to get. The Canadian

and USA outbreaks have recently given Australia 100% of the Japanese and Korean beef markets. An outbreak in Australia would do huge and immediate damage to our market access and price. The disease could be quickly contained and eliminated with early detection and trace back.

- Foot and Mouth disease – another potential disaster for our animal industries. The only previous outbreak in Australia in 1871 was quickly identified and eliminated. In 2000-2001 there were new outbreaks of FMD in 26 countries so the risks to Australia are high.

- OJD – Ovine Johnes Disease is a new wasting disease in sheep, easily spread, hard to accurately test for and impossible to contain or eliminate. It can now be managed by vaccination at a cost.

- Locust plagues occur every 10-15 years and public and private control measures help greatly but don’t ever eliminate the problem.

- Wheat rust, like many plant diseases, can halve or eliminate yield during the growing cycle. Breeding resistant varieties has been very successful but needs constant updates and investment.

- Rubber vine or Parramatta grass are just two of many new and spreading weeds which need combinations of new management and control measures.

- Cane toads, rabbits, kangaroos or wild pigs - need special control measures. - Flood damage can be reduced by long term planning and early warning

systems. Levy banks can protect irrigated crops, buildings and stock refuge areas. Pumps and stock can be moved with early warnings.

- Fire loss can be greatly reduced with planning at an individual farm and district level. Fire breaks, long fallows, lucerne pastures and saltbush areas can all help.

- Insurance of buildings, fences, stock, machinery, crops and pasture can all be covered at a price if you judge the season and risks to be excessive.

- Earthquakes and tsunamis happen, can’t be insured against and people do pick up the pieces and start again.

- Salt is a new and encroaching problem which reduces both production and capital values.

5. POLITICS:

The goal posts can suddenly change because someone or some group signs a new law or regulation. This may reduce or enhance price, market access, or costs of production. Farmers need to sniff the political wind, and on an individual and organised group basis look to adjust plans and management and mitigate the impact. Recent and looming changes are:-

- Dairy deregulation greatly helped Victoria and New Zealand but harmed

Queensland and New South Wales. Considerable warning was given and good compensation was negotiated.

- Free trade agreements can suddenly improve access but increase competition.

- The move from a fixed to a floating exchange rate has exposed Australia to the true world price of money and world speculation and volatility.

- Tax law changes eg GST, land & wealth tax, capital gains tax, Farm Management Deposits, all have to be managed with professional assistance.

- New regulations on land clearing, OH&S, water harvesting, animal care, transport standards, irrigation water use & costs all affect costs and are imposed by legislative compulsion with fines for non-compliance.

- These new regulations must be quickly incorporated into management plans and annual budgets.

6. PRODUCTION INPUT RISK

The budget on product volume, quality and price may all be achieved and a loss still incurred due to unanticipated changes in input costs of production. These changes with new information have to be managed by seeking alternate supply or spreading the cost over time. Examples of sudden input cost changes are:

• Fuel and chemicals costs rise 25% with another supply crisis. • Interest rates double. In future lock in debt interest rates for 3-5 years so that

only 1/3 of your debt matures in any one year. Call for tenders from three banks to take on your business.

• Insurance rates rise 50% after the HIH collapse. Review needs, call tenders, join a group insurance scheme.

• Water costs double. Can new irrigation technology, drip, new sprays, water scheduling, reduce water use and improve yields.

• New technology can be harvested to reduce costs and improve production. Join a top management group, go to research field days, search the Internet, contact key researchers in your field, benchmark your enterprises and farm against a group of good producers.

7. PRINCIPAL (being the sum invested)

Agriculture has always operated with a very high equity because of the highly variable profit stream, the general 2% return on capital, and the reluctance of Banks to lend below 60-70% equity and the farmer’s reluctance to borrow at times of high interest rates and low equity. The problem of undercapitalised farms is that they can’t reborrow to survive the first below budget year. Farmers slipping into a low equity position must weigh the options of another years cycle versus selling and saving the capital they still have. When land prices suddenly rise, Banks tend to overlend to poorly performing enterprises that won’t survive one more poor season, a rise in interest rates or a fall in land values. To preserve your base survival principal eg $1.0 million, decisions must be made to avoid farming on till it is all gone. Long term farmers generally have high equity eg 80% plus, have good borrowing power to take up new opportunities and have a fall back plan to sell one farm and reduce debt given a set of trigger events.

8. PERMANENCE

Family farmers can often have a very long term planning horizon because they plan for a generation. Permanence and security of tenure mostly reduce risk and improve performance. Part of this permanence is the increasing wealth tied up in the land and the buildings. To improve this security farmers can –

- convert land title to freehold (where possible) - avoid, contain or remove land contamination, e.g., arsenic, Helix, Anthrax - improve the capital and aesthetic value of the farm - insure against capital loss of buildings and improvements - put all the farm improvements in top sale order and subtly advertise it with field days

on your farm because you must have at least two people who have fallen in love with it when you finally decide to sell.

- build a farm laneway system to try and match NZ standards - petition the Council for better roads past your farm

- keep buying the neighbours to increase economies of scale, or intensify to use labour and new technology.

CONCLUSION

Risk is like stress, you need some to raise your adrenalin level above zero. People vary greatly in their personal and financial ability to handle risk. Some can cope in one area but not in others and this can change with age. Good planning and execution are the keys to improved performance. Farms can be lost in a hundred ways but there are only three paths to gaining a farm – Patrimony, Matrimony or Parsimony. While luck and a fortunate fall of the dice can help I tend to side more with the retiring CEO who, in responding in his farewell speech, said that he had found that the smarter and harder he worked the luckier he got.

farm financial performancedata.daff.gov.au/brs/data/warehouse/pe_abarebrs99001155/...180...

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