THROUGH THE 1990s, profitable farming systems have been determined by losses in poor years rather than profits in good years. Businesses with high costs associated with intensive cropping and high inputs were affected significantly more by losses than businesses with more moderate cropping intensities and more moderate inputs.
Moderate vs intensive systems
A comparison of a subset of farm businesses in the northern Wimmera, conducted by O'Caliaghan Rural Management, demonstrates that more intensive systems (i.e. more than two-thirds of the farm to crop) when compared to more moderate systems (i.e. half to two-thirds of the farm to crop) achieved:
- higher average income, but more income volati lity year on year
- higher average input costs, and
- lower and more volatile returns per hectare.
Intensive systems are more exposed to the impact of rainfall, climate and price volatility than those with more moderate cropping intensities.
Seasonal income variability
On a year-by-year basis, more intensive cropping systems achieved:
- higher income volatility (ranging from $50 Ilha to $138/ha)
- larger one-off profits and larger one-off losses
- higher costs (average $219lha), resulting in
- four out of 12 loss years.
By comparison, more moderate farming systems achieved:
- lower income volatility (ranging from $366/ha to $90/ha)
- lower one-off profits and smaller one-off losses, leading to more consistent profits
- $7 1/ha lower costs (average $148/ha), resulting in
- two out of 12 loss years.
The extra costs of inputs (average $27 Iha), machinery (average $5/ha) and financing (average $ ll /ha) required by intensive systems yielded no net benefit in returns per hectare. These additional associated costs exposed the businesses to the risk of greater and more frequent losses.
Impact on long-term profitability
Over the 12-year analysis period, intensive business systems in the sample achieved:
- cumulative trading profits in eight years of $246,975, offset by
- trading losses in four years totalling $94,024, and resulting in
- net trading prof,ts of $152,951.
In contrast, the moderate business systems achieved:
- trading profits in 10 years totalling $574,116, offset by
- trading losses in two years totalling $8,612, and resulting in
- net trading profits of $565,504.
The moderate system achieved $412,553 higher cumulative trading profits over 12 years than the intensive system through:
- lower costs
- lower income volatility, resulting in
- reduced frequency of loss years.
Take-home message - profitable farms of the future
Prolitability of dry-land farming in Australia is under increasing downward pressure due to declining terms of trade, seasonal variability, and higher costs relative to income achieved. This analysis is by no means prescriptive, but demonstrates that, to remain profitable in this environment in the future, farm businesses will need to:
- know the environment you operate in, and your exposure to economic and environmental uncertainties
- analyse your historic performance relating to income volatility as a key step in farm systems planning for the future, and importantly
- establish cost structures based on your long-term average income, as opposed to your 'best year' business income.
* Jeremy Hutchings is an agricultural consultant with O'Caliaghan Rural Management, a leading agricultural consulting firm based in Bendigo, Victoria.
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