Grains Research and Development

Date: 01.09.2003

$$ AND SENSE by Jeremy Hutchings: Broad-acre agriculture a strong investment alternative

Seven-year trends for land use (measured as percentage change)

PROGRESSIVE FARM businesses have achieved growth in their total net worth in excess of $140,000 per year and return on capital (adjusted) of up to 16 per cent, according to a detailed study of 224 Farm500 member businesses throughout south-eastern Australia.

Over a period characterised by dry years and severe frosts, these results confirm that grain and livestock production remain strong industries for investors and farm managers.

For the seven-year period to June 2002, the top 10 per cent of Farm500 farm businesses have achieved returns on capital (ROC) of 12 per cent. When this is combined with a 4 per cent growth in the value of land farmed, their adjusted ROC was 16 per cent. The average for the entire sample of 224 Farm500 members was 9 per cent for adjusted ROC for the period.

In comparison, the All Ordinaries Index and Commonwealth Treasury Bonds have achieved 14 per cent and 9 per cent respectively. These results have confirmed that there is potential for strong returns in broad-acre agriculture in south-eastern Australia.

The results of this detailed analysis werepresented to 300 Farm500 members as part of the NAB-sponsored Farm500 Performance Summit held over three days in Bendigo in late July. At the workshop, participants were encouraged to compare their own 12-year performance to that of the performance of the overall database of 224 farm businesses.

Strong returns possible in broad-acre agriculture
Seven-year average return on capital (%) for Farm500 farm businesses
Seven-year average to June 2002UnitLowest 10%Middle 10%Best 10%
Return on capital (ROC)%(2)512
Capital growth in land value%444
Capital growth adjusted ROC%2916
All Ordinaries Accumulation Index%14
Commonwealth Treasury Bonds%9

Trends in assets and liabilities

Other major trends to come from the analysis include the following:

  • an overall increase to total area farmed (up 17 per cent), including use of leasing (up 2 per cent), as managers pursue scale' as a means to grow overall profitability;
  • a significant increase in machinery investment value (up 54 per cent), and similar level of total labour employed on-farm (including family labour); and
  • a 69 per cent increase in debt, made as part of an effective expansionary strategy. This overall increase in debt has been made in-balance with growth of overall assets so that overall equity is similar over the period.

In addition, non-farm incomes grew by 20 per cent over the seven-year period as managers adopt the use of tools including grain pools, warehousing, on-farm storage, farm management deposits and other liquid assets to manage cash flows and grow long-term wealth.

Changes in farming systems

The graph above summarises findings for changes in land use over the seven-year analysis period. Results indicate a trend to less sheep, and to larger and more conservative cropping systems, characterised by more cereals (up 7 per cent), oilseeds and fallow (including green manure legumes (GML)) and less pasture (down 7 per cent) and grain legumes (down 6 per cent).

From the analysis, results confirm that investing in agriculture has proven a successful strategy for established and progressive operators.

As important, a focus towards larger, more leveraged operations adopting more conservative farming systems appears to be the overall trend to achieve these strong performance outcomes.

Jeremy Hutchings is an Agricultural Consultant with 0'Callaghan Rural Management, Bendigo, Victoria 03 5441 6176; email