The most recent Australian Bureau of Agricultural and Resource Economics and Sciences (ABARES) farm survey report paints an improved picture for broadacre farms with cash incomes continuing to exceed long-term averages, writes Jackie White, director, agribusiness advisory at Deloitte.
Institutional investors looking to invest, or make further investments, will be well versed in the underlying opportunity presented by Australian agribusiness – long term favourable fundamentals in supply and demand for clean, green primary produce in close proximity to growing Asian middle class markets. Coupled with an industry structure that is fragmented and deregulated, there is potential for institutional investors to consolidate assets to create scale and diversification (by commodity and geography, for example) to capture larger margins and integrate the supply chain. At the same time, the Australian farmer population is aging and grappling with how to draw down on their business equity to fund retirement.
Farm cash incomes
The most recent ABARES farm survey report paints an improved picture for broadacre farms with farm cash incomes continuing to exceed long-term averages as a result of:
- Generally speaking, a good wheat crop for Western Australia (WA) and South Australia (SA) in fiscal year 2015 (FY15); noting this period includes the crop income received in FY15 (2014 winter crops and 2014-2015 summer crops) and more broadly, favourable seasonal conditions and market prices for the broadacre sub-sectors of livestock and mixed farms
- 2 percent decline in farm costs, particularly fuel, and lower interest payments.
The dairy industry has not had it quite so good:
- Expenditure on fodder, grain and fertiliser in an effort to lift production and take advantage of higher milk prices in fiscal year 2014 resulted in a relative over-supply of milk into FY15, and ultimately lower milk prices
- Whilst interest rates, fuel and cattle prices were lower, the decreases were not enough to offset the lower farm receipts, so farm cash incomes are forecast by ABARES to be considerably lower in FY15.
Summary of cash incomes and commentary
|FY14 Preliminary||FY15 Provisional||Comments|
|Farm cash income (excluding capital payments and payments to family workers)|
|By geography (excluding dairy):|
|NT||364,980||382,100||680,000||Improved pricing should see average farm incomes improve.|
|WA||159,430||263,000||211,000||Dominated by grain and sheep production, WA and SA are expected to have lower production in the current year – coming off record grain crops in FY14. Overall, farm incomes are estimated by ABARES to be around 30 percent higher than the 10-year average.|
|NSW||95,330||108,000||106,000||Higher livestock prices are expected to lift farm incomes but this is anticipated to be more than offset by expected drier seasonal conditions for cropping farms in the north of the state.|
|TAS||69,770||71,400||104,000||High value beef, lamb, wool and vegetable products and favourable yields are expected to increase farm incomes. Expenses are expected to be lower, so overall profitability of broadacre farms is expected to increase by ABARES in FY15.|
|QLD||96,720||68,200||79,000||Dominated by beef and sheep farms, average broadacre farm incomes for Queensland are expected to rise as a result of anticipated higher sheep and cattle prices and continuation of drought-driven herd reduction, offset by lower grain and cropping income (from anticipated drier seasonal conditions).|
|VIC||87,340||98,900||68,000||Similar to WA and SA, lower grain production in FY15 should result in lower broadacre farm incomes, and more than 10 percent lower than the long-term average.|
|For key sectors:|
|All broadacre sectors||110,320||124,600||114,000||Farm incomes are around historical highs – around 20 percent above the 10-year average – driven by increasing farm size, generally favourable seasonal conditions and strong export market demand.|
|Beef||50,180||50,900||63,000||Average farm cash income in FY15 will be slightly below long-term averages despite expected higher market prices and impacted by herd reduction, particularly in Queensland.|
|Wheat & other crops||281,170||349,500||225,000||Crop yields in FY15 are estimated to be lower than the previous year, but incomes are expected to remain above the long-term average of c.$195,000. The proportion of farm management deposit accounts increased from 29 percent to 40 percent, and average balances increased 50 percent, between FY13 and FY14.|
|Dairy||44,130||163,900||97,000||Lower farm gate prices in the dairy heartlands of southern Australia are expected to drive average incomes lower than last year. Conversely, Queensland and Western Australia – servicing domestic milk markets – are expected to see higher incomes than last year.|
Source: ABARES Australian farm survey results 2012-13 to 2014-15, Deloitte analysis
Reserve Bank of Australia data, published by the Australian Bureau of Statistics, confirms that collective Australian rural bank debt reached a new peak in December 2014 (latest available data) of $60.7 billion.
This is an additional $80 million in bank debt on the previous peak (a year earlier, 2013). Additionally, $2.4 billion in rural debt is issued through government programs (also a new record high) and also $1.5 billion of rural debt through the pastoral houses. This is the lowest level in 15 years, reflecting the structural changes in rural banking as typified by the pre-global financial crisis lending environment and formation of RuralBank via the Elders pastoral book.
Total rural debt is just over $64.5 billion, more than three times the total rural debt of 15 years ago.
ABARES definition of farm cash incomes specifically excludes capital payments and payments to family workers (so is not a measure of pure profitability, for example), and around 1 in 5 farms across Australia are likely heading for negative cash incomes in FY15. This provisional estimate by ABARES is broadly similar proportion to the previous two years, but has that consistency of operating losses resulted in increased indebtedness? Well, it depends on your geography and commodity.
ABARES estimates that 40 percent of farms actually reduced their indebtedness in FY15, primarily paying down debt from operating cash surpluses but also some asset sales. Farm debt for drought-affected producers rose by 5 percent in FY15, whilst non-affected producers were able to reduce indebtedness by 1 percent. The geographic sectors with increased indebtedness correlate closely to those sectors that are feeling the effects of ongoing dry seasonal conditions – such as western and northern Queensland and northern inland New South Wales – with increased indebtedness used to cover operating losses or purchase additional land (presumably offering better pastures, waters or geographic & seasonal diversification).
Last year’s excellent wheat crop for WA and SA, and a second strong year for Barkly Tableland, Northern Territory graziers have flowed through to lower average debt levels for wheat and beef industries, likely masking the poorer returns from other primary producers in those sectors but located in other, drier geographies.
- Around 70 percent of total broadacre debt is held by 12 percent of farms
- More than a third of WA broadacre farms and more than a fifth of NT farms have more than $1million farm debt
- Nearly half of the total dairy sector debt is held by just 9% of dairy farms
- A quarter of dairy farms have more than $1million farm debt.
|FY14 Preliminary||FY15 Provisional|
|Broadacre farm debt||475,680||512,500||509,000|
|Farm cash income as a proportion of debt||23%||24%||22%|
|Proportion of farms with farm business debt >$1million||15%|
|Proportion of farms with equity <70%||10%|
|Beef farm debt||284,230||332,700||340,000|
|Farm cash income as a proportion of debt||18%||15%||19%|
|Proportion of farms with farm business debt >$1million||9%|
|Proportion of farms with equity <70%||6%|
|Wheat and other crops farm debt||1,117,200||1,173,600||1,152,000|
|Farm cash income as a proportion of debt||25%||30%||20%|
|Proportion of farms with farm business debt >$1million||34%|
|Proportion of farms with equity <70%||20%|
|Dairy farm debt||765,970||821,400||854,000|
|Farm cash income as a proportion of debt||6%||20%||11%|
|Proportion of farms with farm business debt >$1million||26%|
|Proportion of farms with equity <70%||24%|
Source: ABARES Australian farm survey results 2012-13 to 2014-15, Deloitte analysis
These sectors and geographies are therefore more exposed to adverse interest rate movements (for example) but are also more likely to benefit from scale (purchasing power and off-take agreements, for example). Given our record low interest rate setting, a key scenario for farm business planning is therefore an eventual return to higher interest rates:
- Could the business support higher interest payments on the current debt level?
- What is the maximum preferred level of debt that the farm could support, should interest rates turn higher?
- In a higher interest rate environment, could the farm business raise additional debt should circumstances change – poor seasonal conditions, emergency property repairs or external market shock?
- What proportion of farm receipts should your business be directing to interest payments?
As the farm cash income and farm debt statistics above show, there will be farm businesses that will answer the above questions with a level of discomfort, the answers being less than flattering for a sustainable financial future. Economic theory suggests that some business owners will exit the industry, unable to navigate through such financial challenges, or seek alternative funding arrangements; an equity partnership with an institutional investor, for example.
Institutional investors are well placed to meet the industry’s capital need and play a pivotal role in transforming Australian agribusiness. For several key sectors, including beef, dairy and wine, it is a buyers’ market with plenty of assets to choose from. But that does not diminish the importance of buying with strategic intent (the right asset at the right time for a fair price) and with a willingness to invest further in the asset to overcome capital constraints that may have held the asset back from realising increased productivity, profitability and financial returns.