Success raises the stakes for maintaining profit
GroundCover™ Issue: 102 | Author: ORM Communications
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There is no denying that the past decade has been a challenging period for the majority of grain growers in south-eastern Australia. However, despite the climatic variability and dry seasons known as the Millennium Drought, grain growers have continued to invest in farm expansion, technology and practices to improve productivity.
The associated cost of productivity improvements, combined with seasonal income volatility, has effectively ‘raised the stakes’ and reinforces the need to monitor, manage and maintain farm profits in the future.
The magnitude of the increase in farm cost structures is highlighted in a recent study of farms in the Victorian Wimmera and Mallee. Figure 1 illustrates a 260 per cent increase in total average annual costs from about $380,000 15 years ago to approximately $1 million now for a sample of farms in the Mallee.
Higher total costs inevitably result in higher financial risk through increased expenditure invested each year, coupled with expected higher seasonal volatility of income.
Recently the Reserve Bank of Australia reported that debt in the farming, forestry and fisheries sectors has more than doubled over the past 10 years to about $62 billion. Portfolios of $500,000 to $2 million and more than $2 million have grown steadily, more than 200 per cent, over the past decade. Significant borrowings in these portfolios have been used to add land to existing holdings. Lending volumes in the $100,000 to $500,000 range have increased by only 20 per cent over the period, while lending below $100,000 fell by 40 per cent. It is worth noting that there were 19,000 fewer farming enterprises in 2011 compared with 2006.
These are big numbers across a broad landscape of sectors and they demonstrate that debt servicing is playing an increasing role in farm financial performance.
The analysis looked closely at the profitability of 32 farms to understand what has changed in relation to farm costs and the impact this has had on farm profitability. Figures 2 and 3 show the trends in average farm profit and costs for the farms in the Wimmera and Mallee from 1997-98 to 2011-2012.
Table 1 provides a summary of the observed changes in the five-year rolling average between 2001-02 and 2011-12. The effect of differences in scale has been adjusted out by calculating income and costs per effective hectare. Using hectares of effective farmed area provides a standardised measure for the basis of comparison and analysis.
The total farm costs are broken down into four key areas:
- farm input costs;
- machinery operating costs (including machinery depreciation);
- labour costs (including an allowance for family members); and
- finance costs (including interest,land leasing, etc.).
These results demonstrate the challenge of generating farm profits through the Millennium Drought period. Average farm input costs increased in both regions by a similar amount per effective hectare, but on a percentage basis they were 37 per cent higher in the Mallee (69 per cent increase) compared with the Wimmera (32 per cent increase). This supports the observation that Mallee farming systems have generally adopted more intense crop sequences, coupled with reduced tillage practices, at the expense of livestock enterprises.
Cropping is also thought to be largely responsible for the increasing trend in average farm income in the Mallee (50 per cent increase), compared with the Wimmera (19 per cent increase) where farms adopted more crop-intensive systems earlier.
Machinery operating costs have increased in both regions by a similar amount per effective hectare, reflecting the substantial and ongoing investment in larger machinery for improved efficiency.
Labour costs, both employed and family, have reduced by a similar percentage in both regions, most likely reflecting an ‘economies of scale’ effect as farms have expanded in size. Another likely factor in this decrease is the ongoing investment in machinery with increased capacity, often necessitated by a shortage of skilled labour in regional areas.
Finance costs have shown the largest relative increase of all costs at 134 per cent in the Wimmera and 93 per cent in the Mallee. Trading losses incurred during the Millennium Drought were mostly absorbed into ongoing core debt. The finance costs represent an ongoing commitment to the farm business and therefore become an overhead that needs servicing into the future. The analysis shows that, on average, finance costs are now starting to outweigh farm labour costs.
Total profit has been under significant pressure over the past decade with Mallee farms on average faring better than those in the Wimmera.
It is worth remembering that this pressure has a human face, with many farming families having to make difficult financial and management decisions over this period.
This analysis tells a story about the challenges and financial realities faced by farms in the Victorian Wimmera/Mallee in recent years. Intensification of cropping, gains in productivity, increased debt and a significant step up in farm costs are hallmarks of the past decade. What has evolved is a higher-cost/higher-income farming system with a corresponding increase in the magnitude of risks and rewards. This serves as a reminder that this is no time for complacency and that business analysis and proactive strategic planning are needed to maintain the profit margin.
|Current|| Change in past 10 years
||Current|| Change in past 10 years
| SOURCE: ORM Data
| Total income
| Total costs
| Farm inputs
| Total profit
Brett Symes, ORM Consulting
0419 009 863,
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