Strong returns possible despite frosts

Even last season, when much of the agricultural area was hit by frosts at critical times of crop development and wheat prices at harvest were weak because of four years of record global production, a quarter of WA’s farmers generated an average return on capital of 10.1 per cent.

The overall State average return on capital was 4.2pc from farming, down from 4.7pc the previous year, mainly due to the frosts.

Most of the agriculture area had five or six frosts and some parts up to 10 when the 40-year average was three frosts a season and that had a noticeable affect on equity and farm incomes, particularly south of the Great Eastern Highway.

Last year the average WA farming business generated an operating surplus of $667,815 from a turnover of $2,203,904, down from $680,227 from a turnover of $2,124, 837 the previous year.

“The results show that for a lot of farms earnings of greater than 10pc of return on capital are achievable and achievable over the absolute long-term,” Planfarm director and central and eastern Wheatbelt agricultural consultant for 18 years, Graeme McConnell, told a business breakfast last Friday.

“Agriculture is a really strong industry, a really positive industry that returns some good results.

“But to do that it’s not left to chance, you’ve actually got to be able to manage well and when you buy you’ve got to be able to invest well,” he said, presenting the 2016-17 Planfarm Bankwest Benchmarks.

Planfarm has collected farm data for more than 40 years and for the past 10 years with Bankwest has presented the annual benchmarks based on two data sets.

The report analyses data from 550 farm businesses across the broadacre farming region to provide a single-year snapshot and rolling six and 10-year updates on the performance of about 200 farms.

Good summer rains set up last season and above average crop yields in the 12 months to February this year, with year-on-year production increases of 15.8pc for wheat, 18.2pc for barley, 25pc for lupins and 60pc for canola, showing what record potential might have been had it not been for the frosts, Mr McConnell said.

“A big part of the agricultural area of the State had more than eight frosts and a number of those were extremely significant,” he said.

“Many occurred in August at the time our wheat crops were flowering and that’s when they are most susceptible to frosts.

“It makes for challenging farming because there’s nothing you can do about it, you’ve already spent the money on inputs and you’ve planned for a very, very good season.

“We just had one right out of the bag last year and that’s done an enormous amount of damage and that’s shown right through our Benchmark results.”

Average farm equity slipped slightly to 79pc but was still “very strong, very healthy” with most farms owning almost four fifths of their total assets, he said.

Operating costs had risen to 72pc when the preferred range was 62-65pc.

“That result has been driven I think by the frosts,” Mr McConnell said.

“The levels of frosts has started to take away income and operating costs at that point are largely fixed, so basically operating costs appear as a higher proportion.”

The average farm generated an operating profit of $178 a hectare last year, a 13.4pc increase year-on-year, which he described as an OK result.

It was clear the top 25pc of the State’s farmers last year were in areas less affected by frosts – mainly the northern Wheatbelt centred on Geraldton – and without taking land values into account, generated a return on equity of 8.6pc.

But the long-term study data indicated the top 25pc of farms in each of the 17 agriculture regions referred to by the Agriculture and Food department within the Department of Primary Industries and Regional Development generated return on equity of better than 6pc.

Mr McConnell said in areas not affected by frost, there were no significant difference between the top 25pc and average farmers in the same region.

“It probably comes back to one of the old (American business magnate, investor and philanthropist) Warren Buffet comments that a rising tide lifts all boat,” he said.

“It was one of those seasons where it didn’t really matter what you do or how you farm, more important was where you farm.”

The difference between the performance of the top 25pc of farms and the average and poorly performing 25pc increased progressively into regions hit hard by frost.

The two cropping areas hit hardest, Hyden and Newdegate, experienced the lowest cash returns of all broadacre regions of just 0.2pc and 1.9pc respectively.

“In worst frost areas the average (return) was quite poor (and some farmers) barely generated a profit, which is terrible,” Mr McConnell said.

“Last year was a record year for (agricultural) production but it wasn’t an outstanding year for income,” he said.

Many farmer’s bottom lines were helped by good returns from sheep and wool.

“High wool prices and high sheep prices are starting to show in our numbers as a percentage of farm income at just under 20pc – that’s the highest it’s been since the late 2000s, apart from 2010 which was a drought that affected crops.

“What we are seeing through the Wheatbelt is a lot more people getting a lot more interested in sheep, doing really, really well and making that work,” Mr McConnell said.

“You can get good returns out of farming and you make those returns work really well and consistently.

“But you’ve got to capitalise on the good years and that holds true.”

There were some common factors across the top 25pc of farmers in each region including size and scale of effective farming area, spending more on fertiliser and chemical inputs to achieve higher yields and capacity to invest in new machinery or more land, which separated them from the rest, he said.

The top 25pc last year achieved 24pc higher wheat yields, 20.4pc better water use efficiency and had a 9pc larger cropping area.

The average farm was about 4454 hectares, compared to just over 3000ha in 2004, and the top 25pc tended to be among the larger farming operations.

They were also the main buyers of new machinery.

The cost of farm machinery was “getting to quite extreme levels”, Mr McConnell said, and was reflected in benchmarks data.

“It is something I think that is going to be a challenge for the industry in the next five to 10 years unless something happens.

“There’s already been a lot of consolidation in that industry and you talk to dealers and they say there’s not a lot of money in selling machinery.

“But we pay a hefty premium in Australia over a lot of European and United States farmers for machinery and it is one of the challenges in our industry that we have to resolve to stay more efficient,” he said.

There were differences between the top 25pc in each region, Mr McConnell said.

“Different things are getting rewarded in different regions so you need to understand your region and what works for your business.

“It’s not as simple as ‘here’s the formula, take it’.

“It’s more complicated than that.”

Relatively small operational differences had potential over time to create big differences in equity and growth, he said.

“Across the State the average farm in 10 years has generated about $2.3 million worth of equity gain which is pretty good when you consider the average business equity is about $7.4m, so $2.3m of that has come in the past 10 years.

“But the top 25pc have gained nearly $3.7m so there’s a big incentive to take those small steps and make those small differences.

“Differences in wheat yield and in operating costs are quite small but make big differences to the final numbers when you are looking at that over time – it applies in all regions.

“The top 25pc in the low rainfall areas have added $6.2m to their businesses which I think, given it’s low land-value farms, is incredible, but in all regions there’s been pretty good performances.”

Across the past 10 years the top 25pc of WA farms have generated 10.7pc return, the average farm generated 6.6pc return and the bottom 25pc generated 3pc return, according to the benchmarks.