Written by: Cameron Weeks | Farm Business Consultant | 0427 006 944
“The contrast is necessary for the focus”.
The 2022/23 annual review and budget season is coming to an end and in summary the experience for clients is a one of contrasting emotions. On one hand celebrating a bumper financial result in 2022 but on the other looking forward with some trepidation!
Given that recent times have indeed been so good for many perhaps the challenging forecast is the jolt needed to get rid of any complacency?!
With the above in mind I thought it would be worth summarizing what I’ve seen including looking backwards at 2022 but most importantly looking forward to 2023.
I must admit there is no particular message in the below although for many of you who perhaps felt concerned by your 2023 forecast maybe there will be some solace in recognizing that you are not alone.
- Crop production was outstanding with yields amongst the highest ever recorded.
- Crop water use efficiency was again excellent driven by the wet and cool finish plus good management.
- Canola area sown was far larger than budget with lupins the big loser in terms of area.
- A higher-than-normal proportion of the crop remains unsold or committed to CBH pools including the deferred sales pool. Thus, financial results have been calculated based on the market price on the day or the estimated pool return.
- Livestock production was mostly on budget to slightly below driven by easing sheep and wool prices. Lower cattle prices also put downward pressure on cattle income.
- Total farm income generated was typically the highest on record or very close to.
- Operating expenses though were the highest ever recorded often >150% of 2018 which I’ve found is a fair comparison year as it too was high production.
- Operating expenses were typically 10-30% higher than budget (remembering we budgeted high due to high input costs) with a large proportion of this driven by the high yielding nature of the season (extra freight, CBH charges, nitrogen, spraying, crop insurance, etc).
- Because of the extremely high input costs bottom line profits though range from best to 2nd / 3rd best (competing with 2021 and 2018 for many).
- Many clients have ended the year at 100% equity and my estimate is the 2022 Benchmarks will show approximately 50% of participants at this level!
- Equity has increased between 250-400% over the 2017-2022 period.
2023 – the forecast
• Budgets have been prepared using the client average crop yields and prices.
• On average this is approximately:
• Wheat $340/t
• Canola $675/t
• Barley $290/t
• Lupins $360/t
• On planned crop areas at average yields and prices budgets typically look underwhelming!
• I have been measuring budgets by projected operating efficiency (operating expenses as a % of farm income).
• Historically strong preforming businesses operate at approximately 60%-65%.
• The best budgets for 2023 have been 75-80% and the not so good have been >90% highlighting just how challenging the high costs are to farm businesses.
• The later prepared budgets are looking somewhat better on the back of the reduced cost of Nitrogen given Urea was $1,200/t at the start of the summer and now sits at sub $700/t, but they are still highlighting that average crop yields and prices are not good enough.
• The good news is wheat today was $400/t so that represents an opportunity!
• From a borrowing perspective the vast majority are borrowing significantly less at their peak in 2023 with the peak occurring for some in June due to deferred grain income.
• If realistic land values are used most businesses have a substantial borrowing buffer ‘up their sleeve’ if needed.
• Taxable income for 22/23 based on 6-8 months of actuals plus budget estimates suggest large amounts of tax coming due for payment in 2024. This is a combination of the run of excellent seasons plus the instant asset write off scheme that now sees plant depreciated to zero and profit being realized on sales/trades.
• Most owners / managers feel anxious about the coming season which is very understandable given the risk involved (high costs) and the general feeling that a poor season is overdue!
• The reality is though that anything could happen, and BoM will tell you there is no relationship between what happens in one year to the next, so this year has equal chance of being poor as it has average as it has very good.
What can be done to manage 2023 and the risks?
• Plan for a dry start as well as a wet and well-timed start. Is there scope to leave out a proportion of country if it does indeed get too late for comfort?
• Keep crop inputs at an appropriate level for crop potential. Think through the rate of fertilizer inputs at seeding especially if dry seeding.
• Keep in mind when planning that a below budget crop might not be enough to make a bottom-line profit but it will most likely still generate a useful margin and therefore make a valuable contribution to fixed costs.
• Consider whether to lock in well above budget grain prices especially when the season does get underway (remembering a key message out of budgets was that average grain prices are typically not good enough).
• Most of all keep focused, make the most of the seasonal opportunities as they present, and remember that we had a very similar outlook going into 2022 and look how well it turned out!
• Also make sure that you are well positioned for 2024 no matter what 2023 brings. It’s as always, a ‘long game’ farming.