New era of growing grain requires new business approach

Author: Sharon Watt | Date: 25 Aug 2016

Agricultural consultant Ed Hunt, pictured speaking at a GRDC Update, says grain farms of today have a very different risk profile to those of 20 years ago and need to be managed accordingly.

The arrival of a new era in grain production means today’s growers must operate their businesses differently to those of the past if they are to be successful.

Agricultural consultant Ed Hunt says grain farms of today have a very different risk profile to those of 20 years ago and need to be managed accordingly.

“The face of grain farming has changed dramatically over the past two decades and businesses should be structured differently to be both profitable and resilient,” said Mr Hunt when speaking at Grains Research and Development Corporation (GRDC) Grains Research Updates in the southern cropping region.

“The number of individual farms has reduced, average cropped area per business has increased, there have been critical changes in the farm income to cost ratios, and a shift from mixed farming systems to a much higher percentage of intensive cropping systems.

“Land values in grain-growing areas have typically doubled, debt levels and total interest paid per grain farming business are at record levels, and machinery costs per business have typically doubled.

“Climate variability in season and between seasons and trends over time have changed.

“When combined, this equals a new era for grain farming businesses and to be successful in this new era, decisions must be made differently by farmers, and the advice, products and tools of the service providers have to continue to change,” said Mr Hunt, of Ed Hunt Ag Consultancy on South Australia’s Eyre Peninsula.

Over the past two years, Mr Hunt has worked with focus groups in South Australia, Victoria and New South Wales to evaluate the profitability and risk of farm businesses managing different farming systems.

The work was undertaken in partnership with Mallee Sustainable Farming through the GRDC-funded Low Rainfall Profit and Risk project.

The focus groups – located at Cummins, Waikerie and Karoonda in SA, Ouyen in Victoria, and West Wyalong in NSW – were each responsible for developing a model farm that was representative of their local region.

Multiple scenarios were applied to each model farm (such as altered crop intensity, plus and minus livestock, business expansion and machinery investment) and cash flow and end cash balance was calculated for a range of seasonal deciles (1, 3, 5, 7 and 9).

Mr Hunt said that one of the most critical messages emanating from the project was that analysing business profitability in only an average season was “almost a useless exercise”.

For example, one of the model farms had a much greater capacity for profit in better seasons when set up for continuous cropping, however, it was a much riskier business than the comparative mixed farm in poor seasons when greater losses were incurred.

"While a current move to high input farming systems may provide for increased profitability in above average years, more attention needs to be given to the business's ability to cope with successive poor performing years," Mr Hunt said.

“Planning and risk buffers must be extended out to cater for multiple years. Leveraging of increasing land values must be considered and managed carefully in an era of zero to negative productivity growth, increasing costs and record low interest rates, while still recognising that businesses must continue to increase in scale over time to remain competitive.

“In the low rainfall Mallee regions of SA and Victoria, lower cropping intensity, greater use of legume crops and pastures, livestock, off-farm income and prudent machinery expenditure are some of the key strategies businesses are using to remain profitable and to effectively manage risk.

“However, what the statistics and experience show is any farming system can be successful when managed well in accordance with the correct financial risk position for the business.”

Mr Hunt believes the future for Australian agriculture remains bright: “Businesses who address the factors of the new era and plan for current trends will remain profitable and successful into the future.”

More information on managing profitability and risk in a grain business can be found in Mr Hunt’s GRDC Grains Research Update paper at the GRDC Update Papers page.

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