Drivers of farm profit underpin strong investment

Drivers of farm profit underpin strong investment

The latest data from ABARES demonstrate that returns on agricultural investment are often equivalent to or higher than investing in alternative assets generally available to the broader community.

Peter Gooday

ABARES Assistant Secretary of Farm Analysis, Peter Gooday, said that establishing a better understanding of profit and loss at the farmgate would be an essential step towards attracting better investment in the agriculture sector.

“We know that some farms earn risk-adjusted returns that are comparable with those generated by alternatives such as bank deposits and shares, but many farms generate relatively low or negative returns,” Mr Gooday said.

“Understanding the causes that underlie differences in farm profits will be essential to improving farm performance, developing appropriate policy settings and attracting investment across the sector.”

Delegates at the Outlook conference session also heard from Sasha Courville, Head of Corporate Responsibility Strategy at NAB; Graeme McConnell of Planfarm; and David Brownhill, of Merrilong Pastoral Company, who shared their insights into farm business profitability.

“Natural capital can make visible the economic benefits of good environmental management, and has a vital role to play in the success of farm businesses,” Dr Courville said.

“Investment in natural capital can improve productivity, which in turn improves profitability, and leads to improved business resilience. Resilience is the ultimate key to long-term success for farm businesses.”

“In our analysis of profitable farm businesses, we found that the most successful businesses consistently showed focus and passion, in-depth knowledge of their property, margins and region, and focused on savings in their inputs,” Mr McConnell said.

“For our family farm business, separating business and family, setting clear goals, using a board structure and good planning have all been important factors for our profitability,” Mr Brownhill said.

“Measuring and benchmarking are also key – if you can’t measure it, you can’t manage it.”

Mr Gooday said that while farm cash income for broadacre farms was projected to have declined in 2014–15 to average $114 000 a farm, this was still around 20 per cent above the 10-year average.

“For the dairy industry, farm financial performance has varied substantially and is projected to decline to $97,000, around 14 per cent below the 10-year average,” Mr Gooday said.

“Farm business debt is estimated to have declined slightly for broadacre farms since 2009–10 as a result of a reduction in new borrowing and continued debt repayment. In 2013-14 total debt averaged $512 000 a farm.

“The average size of broadacre farms has been increasing, driven by the strong positive relationship between farm size and profitability. At the same time, the number of farms has been declining.

“Structural adjustment driven by growth in farm size has played an important role in generating the productivity growth required to offset the effects of a declining terms of trade on farm profit.”

First published in Leading Agriculture Issue 6