2003 on record as year of the profit

11 Aug, 2004 10:00 PM
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THE results of the 2003 WA Farm Business Survey have just been released and show record profit levels for farm businesses across the state.

Not surprisingly, the record 2003 grain harvest was a key factor behind the results.

Wheat yields in the low rainfall regions averaged 2.2t/ha. It was the first time in the survey's 24-year history that yields exceeded 2t/ha in the region. Similarly, wheat yields in the northern medium rainfall areas were 400kg/ha higher than the previous record of 2.55t/ha set in 1993.

The impact of the record yields was partially offset by softening commodity prices. AWB Ltd¹s estimate for the 2003 APW wheat pool was more than 10pc lower than the returns from the previous two seasons. A similar trend was observed with wool prices.

Regardless, farm income levels in medium and low rainfall regions were at record levels. The exception was the high rainfall region, where income levels were not as high as those achieved in 2002. This was a reflection of softer commodity prices and the fact that crop yields in the high rainfall areas were not as far ahead of previous records as they were in other regions.

The operating profit in the high rainfall regions averaged $129/ha. It is below what was achieved in 2001 and 2002 but the only other time average profits exceeded $100/ha in the regions was in 1989. This highlights how successful farm businesses in the higher rainfall environments have been in the past few seasons.

The average profit in the northern half of the medium rainfall region was the highest recorded for all parts of the state in the survey's history.

The low rainfall regions recorded an average profit of $135/ha. When expressed as a percentage of the capital employed in the business, this gave an income return on capital of just under 10pc. By comparison, the average return on capital in the high rainfall regions in 2003 was only 3pc. So while farmers in lower rainfall regions have suffered in the droughts, they also have the capacity to generate the best returns when conditions are favourable. But it should be noted these figures do not include the capital gain on farm land which forms a major part of the total returns from farming.

In addition to the record operating profits, the survey revealed strong growth in net business equity across all regions. In the higher rainfall areas, this was largely due to increasing land values. Moving inland, the effect of rising land values was less pronounced and the operating profits became the main factor driving the increase in business worth. The average equity at the start of 2003 of businesses surveyed was $3.38m.

p Variability in performance

ONE of the key issues highlighted in the survey analysis was the level of variability in physical and financial performance observed in the regions.

In the southern half of the medium rainfall region, the 25pc most profitable farmers had farm incomes 1.7 times that of the 25pc least profitable group. Operating costs for the top group were similar to those of the region's average. But the least profitable group had lower operating costs, reflecting the fewer resources allocated to fertilisers and weed and pest control. The end result is the top 25pc of farmers in the region had an operating profit more than triple that of the bottom group.

Good production results were the key behind the success of the top group of farmers. On average, they produced an additional 0.5t/ha of wheat and 6.5kg/ha of wool compared to the poorer performed businesses. It is not that these businesses are chasing production at all costs, rather they simply appear to make more efficient use of a similar level of inputs than the average farmer.

p Economies of scale

BUOYED by very good profit results in recent years, strong commodity prices and low interest rates, many farmers have taken the opportunity to expand their land holdings.

With this in mind, part of the focus of the 2003 survey was to examine the interaction between farm scale and profitability.

It was found farm scale had little impact on operating profit per hectare. Larger businesses may benefit from bulk discounts on chemical and fertiliser orders but these discounts are relatively minor to the overall cost of the inputs. Smaller farms tended to have higher repair bills ($/ha) but this was offset by a trend towards lower labour costs per hectare. The conclusion was small farm scale was not a barrier to achieving good operating profits per hectare.

The major benefits from increased scale came from spreading overhead costs like personal drawings over a greater area.

Although in many ways a fixed cost, the benefits of scale were less apparent for the amount of plant capital invested per hectare. In the northern half of the medium rainfall region, the maximum amount of plant capital was approximately $300/ha once farm size exceeded 4000ha. Below 4000ha, the maximum amount of plant capital was as high as $500/ha. But the lowest levels of plant capital invested were also found on smaller properties. This indicated a preparedness of smaller businesses to use existing and second-hand plant, compared to their larger colleagues who were more inclined to purchase new equipment more frequently.

The WA Farm Business Survey is compiled by Planfarm with the cooperation of Bedbrook-Johnston and GRD Byres & Co. Copies of the report can be obtained by contacting Planfarm on 9322 7244.

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