'Drought proofing' farm businesses
IN A volatile and unpredictable industry such as agriculture, profitable businesses are those capable of stabilising income year upon year. To do this, farm businesses must understand their long-term average income and use it as a primary tool in planning, target setting and structuring their farming systems.
Robust business systems, capable of withstanding seasons like 2002, are those setting their operation to achieve long-term average income, not maximum yield.
What is your long-term (5-year) average farm income?
Long-term average income is an important planning tool for growers. The 2002 season provides good insights into how we can use long-term average income to review performance.
Hallmarks of a robust farm business
Drought throughout the 2002 season has seen significantly reduced yields across much of Australia. Although offset by historically strong grain prices, per hectare returns and farm income were often 60-90 per cent below the typical figures for farm businesses. In this climate, some farm businesses have successfully minimised losses and even achieved modest profits and equity growth in 2002.
The success of these leading businesses can be best understood using long-term average income as a guide. These businesses are:
- diversifying income to support cash flows
- targeting 25 per cent of long-term average income from elsewhere, i.e. livestock enterprises or non-farm income (from salaries, contracting and dividends, for example)
- consistently achieving targets for operating costs (overheads and variable costs) of less than 50 per cent of long-term average income
- maintaining machinery investment levels less than or equal to long-term average income
- maintaining debt levels less than or equal to long-term average income, and financing costs at less than or equal to 10 per cent of long-term average income, and
- ensuring that 'money in the bank' (including FMDs, pools, stored grain and fodder reserves and shares investments) are to the value of 40 per cent of long-term average income.
The extent to which growers can meet all these targets will depend on their position in the growth cycle. For example, a growing business may be characterised by higher debt levels and associated financing costs than more mature businesses.
As a key tool in planning for 2003 and the next five years, farm businesses should understand their long-term average income and assess components of their business against these targets, as achieved by leaders in the industry. Where businesses are not achieving these targets, that should become a focus of planning for the next five years.
* Jeremy Hutchings is an Agricultural Consultant with O'Callaghan Rural Management, Bendigo, Victoria, 03 5441 6176; email email@example.com