Farm entrepreneurs to drive agri-sector growth

There’s been the equivalent of a sheep weather alert out on Australian agriculture in recent times. The common refrain from some quarters is that without government grants and import limitations there is little future.

Beneath the surface though the story is much more complex – and promising. It is true the profitability and sustainability of farms across the country does vary greatly. ANZ's ‘Greener Pastures’ report found the gap between the top 25 per cent of farms and the bottom 25 per cent of farms is wide – and increasing each year. The top 25 per cent deliver returns on capital of more than 5 per cent while the bottom 25 per cent actually destroy value.

This broad analysis that larger farms are more profitable drove many farms to increase size through land acquisitions (funded by debt) in the early 2000s. Now some of those farms struggle under the debt burden.

But whether or not the strategy was flawed actually depends on the tools used for comparison.

According to Catherine Wall, an agribusiness and food industry consultant, “many have successfully achieved scale while their neighbour next door who should've shared the same success has not”.

The additional land acquired was used to gain economies of scale and larger farms have indeed shown a greater ability to service their debt as a result.

“Australia's high cost of labour, transport and inputs means savings from scale are critical for us to be able to compete against low cost competitors,” Wall says, with the added caveat, “...it is equally important to note that small agribusinesses can still be very profitable if they don't over capitalise and get their business model right.  It is the mid-sized farms which are too big to be boutique and too small to achieve scale, that will struggle.”

There are though significant challenges: “Achieving scale often entails taking on high levels of debt which adds to business risk.  Some agribusiness operators simply do not have the business skills to manage this risk.”

Graeme Ford, CEO of the Victorian Farmers Federation, says a farm’s capacity to cope is not just weather related but also connected to the skills of the farmer “If you over-leveraged in striving for growth and economies of scale and then faced 10 years of poor conditions that put considerable amounts of pressure on the farm,” he says. “Some did better - and business management skills are an increasingly important factor in success or failure.”

Farm debt doubled in the 10 years until 2009 but it has declined since. A complicating factor was that increases in average debt size during that period partially arose due to the exit of small farms with little to no debt at all, creating an apparent boost in average debt across the sector. 

Average farm debt also varies significantly by type of farm with average dairy farm debt almost double that of broadacre farming in 2012-13 (which is in fact a decrease over recent years).

Much recent popular coverage of the agri-sector has centred on falling land values as the reason behind struggling farm performance and the limited ability of farms to raise capital.

Yet while land values have fallen on average since the highs of 2007-08, the degree of that fall varies greatly depending on the zone of land. Moreover, measured over even the last decade, land prices are still higher despite having fallen off the rather extraordinary highs of 2007-09.

Land used for the production of wheat and or sheep has fallen the most while that in pastoral zones has hardly fallen at all. Indeed land prices in general seem to be trending back to the average rate of growth between 1980 – 2002.

“Land devaluation has been an element down in the south west (of Victoria) where it was more of a correction. There had been inflation in the value of the land due to managed investment schemes for timber with government tax benefits, and dairy farmers had to compete against it,” Ford says.

Land prices for Broadacre farms, by zone

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Irrigation has also played a crucial role in the value of properties. “Ex-dairy farms that have sold off their permanent water and access rights to the irrigation grid have been substantially devalued while others who have retained their connection and implemented state-of-the-art on-farm irrigation infrastructure now have a far more valuable land asset,” Wall says.

The declining land values have not necessarily led to a decline in farm equity either as farmers have directed more of their income towards paying down debt in recent years. As a result, farm equity remains around 87 per cent. That doesn’t seem to be evidence of an equity crisis.

Change in farm business debt and equity, broadacre farms

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Where there are issues however is when farms seek to raise additional capital – either to fund current operations or to achieve the scale necessary to increase margins and service debt. Greener Pastures revealed a capital gap of over $600 billion in Australia, a gap extending out to 2050, even under a ‘base case’ scenario of growth. 

Cumulative capital required - by requirement source

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Source: ANZ insight series, ‘Greener Pastures: The Global Soft Commodity Opportunity for Australia and New Zealand'.

RBA data shows that funding from banks has declined slightly between 2009 and 2013 by $2.7 billion (after inflation), so additional sources of capital will be required going forward.

The sheer scale of funds required means a significant rethink of the way farms currently fund their growth if Australia is to ever fully achieve ‘food bowl’ status for a growing Asia. Succession planning, or the lack of, is a particular problem for farms in Victoria. “If you have a farming family and the parents are in their 60s and the next generation don’t look like they’re interested, why would they be pushing production and investing?” Ford says.

Sources of capital might include foreign investment, encouraging greater succession planning, public private partnerships to fund improvements to infrastructure or greater vertical alignment within industries to boost efficiency.

And it is true some of these changes however may well be met with resistance. “Most family-owned farming businesses do not consider raising external capital,” Wall says.

“In fact, the concept is quite unorthodox to most. A key reason for this is the connection to land ownership. The idea of selling off a chunk of the family legacy to an external investor is hard to digest.”

Ford agrees. “Farmers are conservative by nature. But maybe the long term function of moving away from marketing boards is the emergence of the ‘farm entrepreneur’ –farmers setting up their own processing and their own brands. We’re in a period of transition at the moment as farmers have to start taking more responsibility for their own products after they leave the farm gate.” 

Read the full report from the Australian Bureau of Agricultural and Resource Economics and Sciences.

Nicole Franklin works in Corporate Communications at ANZ, coordinating the ANZ insight series.

Photo: Jennifer Farmer