Ground Cover North : Ground Cover 095 November-December 2011 - North
Risk management NOVEMBER -- DECEMBER 2011 GROUND COVER 35 "You wouldn't go there for liquidity because you can go through bad periods (Table 2) when realising the value of the farm can be difficult." Also, eastern wheatbelt farms in WA are usually large and the number of individuals or companies likely to buy such operations may be limited at times. Bankwest's Peter Rowe also notes that farming in the eastern wheatbelt is more volatile. In consequence, he says, farms need to be able to cope with several poor seasons in a row. The flipside is that land values in these areas are usually low relative to profitability. Mr Kirk says an analysis of his clients' equity (asset value minus debts) in the eastern wheatbelt has shown land value to be a smaller component of total net wealth than for clients in the medium and high-rainfall zones. The 2009-10 Planfarm Bankwest Benchmarks show a fall in equity from 78 to 75 per cent, with debt per effective hectare increasing from $445 to $559 and further drops expected from the 2010-11 financial year due to the widespread drought in 2010 (Figure 2). Debt levels A report on the benchmarks noted the increase in debt appears to be a combination of farm acquisition (increased farm size), machinery investment (tax incentive) and trading losses. Long term, Mr Rowe says debt consolidation will be necessary to reduce declining equity. "The movement in equity during the past two years indicates many businesses may be at or near their capacity to service debt," he says. "Resolving the slide in equity is a priority." Ken Sevenson of Corporate Agriculture Australia agrees, adding that growers may need to modify how they apply agronomy packages and agronomy outcomes to the production over the next few years. "It may have taken one or two years to get into this situation, but unless there is a massive turnaround in profitability it will take five years to recover," Mr Sevenson says. "This will constrain choice for some. "The sad part is that businesses with less than 50 per cent equity are not likely to survive in the current environment," he says. "People with 60 per cent equity will struggle and survival will depend on grain prices and interest rates." Eastern picture However, NSW-based Holmes Sackett consultant John Francis urges caution when looking at equity as a financial indicator. Although he says some of his clients have a low equity, their debt serviceability is good. "They are in this position because they lease a large proportion of total assets," he says. According to Mr Francis, the Holmes Sackett benchmarking data set shows average equity is 85 per cent. The data comes from farms located across south-east Australia including NSW, Victoria and Tasmania. Only 17 per cent of benchmarking participants had less than 70 per cent equity at the end of 2010. And getting back to the WA study, Greg Kirk says that for those with capacity to buy more land to expand or to lift profit, buying rainfall may not always be the best strategy. Indeed, for high-rainfall farmers looking to expand, he says a well-chosen low-rainfall property is likely to be a more profitable option than the farm next door. In related research, Mr Rowe analysed operating profit per millimetre of growing season rainfall over six years to determine which areas in WA's grainbelt were the most efficient at converting rainfall into profit. The results showed that the most efficient areas were the medium rainfall zones 2, 3 and 4 followed by low-rainfall zone 4 and high-rainfall zone 2. Crop choice When it comes to deciding which crops to grow, a study by Planfarm's Cameron Weeks and PRT Consulting's Peter Tozer showed operating surplus or farm profitability is driven by wheat yield more than any other management factor. Mr Sevenson agrees, adding that Farmanco benchmarking figures have shown wheat yield has always been a key driver of profit in WA farming systems; but, with that said, there have been three loss years in the past five. This means growers under extreme financial pressure with limited working capital need to take a low-risk approach. "Be cautious about pursuing high-cost, high- input cropping regimes with the expectation that they will be more profitable," he says. Mr Sevenson notes, however, that barley has come to the fore as a key profit driver and canola has been a strong contributor too in recent years. "Two loss-makers are lupins and field peas," he says. "This will impact on the ability to generate sustainable crop rotations, but a flexible and balanced rotation is important for profitability ... although it's not the time to be experimenting with radical crop rotations which might be loss-making." Top performers In the 2009-10 Planfarm Bankwest Benchmarks, the top 25 per cent of grain specialists had better yields (wheat at 2.14t/ ha compared with a 1.85t/ha average), meaning a higher gross farm income ($460/ ha compared with a $336/ha average). This means the top 25 per cent of grain specialists had higher operating surpluses compared with the average ($147/ha against $42/ha). It was a similar story with costs management. For the top 25 per cent, operating costs were 67 per cent of income. The average among other growers was 87 per cent, not leaving much for fixed costs, interest, drawings, capital and profit. Going forward, the ABARES 2011 Australian Farm Survey projects an improved financial outlook for agriculture nationwide, with average farm cash income for broadacre farms to increase from $58,900 per farm in 2009-10 to $82,000 in 2010-11. □ GRDC Research Codes CSP00109, GIA00001 More information: Greg Kirk, 0427 428 400, email@example.com; Peter Rowe, 08 9420 5179, 0408 913 152, firstname.lastname@example.org; Ken Sevenson, 0427 412 200, ksevenson@corpag. com.au; John Francis, 0427 259 005, john@ holmessackett.com.au; www.grdc.com.au/CSP00109, www.grdc.com.au/GIA00001 TABLE 1 Western Australian rainfall zones Rainfall area Abbreviation Zones covered Average annual rainfall (mm) High rainfall north HRFN H1 and H2 450 to 750 High rainfall south HRFS H3, H4 and H5 450 to 750 Medium rainfall north MRFN M1 and M2 325 to 450 Medium rainfall south MRFS M3, M4 and M5 325 to 450 Low rainfall north LRFN L1 and L2 < 325 Low rainfall south LRFS L3, L4 and L5 < 325 TABLE 2 Return on capital (%) by WA farmers from 1999 to 2009 Year 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Average 1.60 --2.20 5.30 1.60 4.90 1.40 2.00 --0.90 6.08 7.05 --1.38 Top 25 per cent 8.70 4.90 12.70 10.50 14.90 10.70 10.40 7.10 16.05 20.12 4.26 Note: The top 25 per cent are not necessarily the same each year Source: 2009-10 Planfarm Bankwest Benchmarks KEY POINTS n A WA survey shows low-rainfall cropping areas can produce the highest return on equity n Farm equity in WA is decreasing to critical levels n A flexible and balanced crop rotation can improve profit reliability Survey shows investment strength in low-rainfall areas A Western Australian benchmarking study shows the highest return on equity is found in low-rainfall areas and that wheat yield is a key profit driver generally SOURCE: Greg Kirk and 2008 Planfarm Bankwest Benchmarks Figure 1 Average operating surplus ($/ha) per $ land value 2003-08 by rainfall zone $ operating surplus / ha / $ land value 0.20 0.15 0.10 0.05 0 Rainfall zone H1H2H3H4M1M2M3M4L1L2L3L4 Key: See Table 1 SOURCE: Greg Kirk and 2008 Planfarm Bankwest Benchmarks 90 88 86 84 82 80 78 76 74 72 Farm debt Farm equity Figure 2 Farm debt levels and equity 1998-2010 Debt (dollars per effective hectare) Equity percentage 600 500 400 300 200 100 0 Year 98990001020304050607080910 Greg Kirk, Planfarm. PHOTOS: NICOLE BAXTER Ken Sevenson says farm business equity in WA has decreased in many cases to critical levels. By Nicole Baxter n An analysis of more than 500 farm businesses shows that those looking to buy more land may be able to make a better return on investment by adding a low-rainfall property to their portfolio. Planfarm consultant Greg Kirk analysed the WA Planfarm Bankwest Benchmarks over a six-year period and discovered more money was made per dollar invested in land in low-rainfall areas than in medium and high-rainfall areas (Figure 1 and Table 1). For the top 25 per cent of farmers, the trend was the same with low-rainfall farms in northern WA, which achieved a higher return on land value than low- rainfall farms in southern WA. Mr Kirk says Planfarm analysis suggests buying land in the eastern grainbelt is worth considering. But he notes there have been periods when land in this area was not saleable.
Ground Cover 096 January-February 2012 - North
Ground Cover 094 September-October 2011 - North