An international benchmark study to which ORM contributes has confirmed Australia has lower crop yields and higher income volatility than our competitor grain producing countries. 2018 again reinforced this high yield variability, however those that were able to get some yield have been well rewarded with very strong commodity prices.
Client business reviews with ORM have started early this year, with some of the considerations for this planning season to include:
Land is still a good long-term investment
The threefold increase in dollar net worth over the last 20 years is typical for ORM clients. Farm land can be around 70% of total asset value, many have grown land area by more than 50%, and when combined with capital appreciation of land averaging around 5% per annum, then land continues to be a good long-term investment.
Costs are rising faster than commodity prices
Over the last 20 years growth in farmed area combined with enterprise intensification has resulted in a tripling of total costs. Higher costs have been balanced by more grain production and a rise in commodity prices. The 5 year average price per tonne of wheat has increased by 66% from $150 per tonne in early 2000’s to a 5 year average of $250 per tonne now. However, crop yields are fluctuating with seasonal variability so that total income is now more volatile than costs.
Consider increasing livestock in your enterprise mix
Meat and wool prices have rallied strongly in the last few years and have lower production costs and less income volatility. Aside from the agronomic benefits of a break in the crop rotation, a Gross Margin comparison of sheep to crops suggests there’s good reason to include more livestock in mixed farming systems.
Plan for the future, don’t rely on what has worked in the past
In recent years we’ve had an economic recipe for good times. Low interest rates, when combined with extra security through growth in land values, has supported rapid growth in scale for some. The future is never certain and forecasters can only make educated guesses based on assumptions they make. Without certainty, plan for the unknown.
Be prepared to take opportunities as they arise.
An ORM recommended financial strategy is to have financial buffers sufficient to cover 12 months of costs. This financial buffer can be in the form of carry over income such as grain in store or FMDs, extra borrowing capacity with the bank, or liquid assets such as shares. Strong financial buffers lead to strong business resilience, so you are well placed and ready for opportunities as they arise.
On behalf of the ORM team, we look forward to working with you all and hope that 2019 brings opportunities your way.
For more information contact Phil O’Callaghan at phil@orm.com.au