Following on from Cameron Weeks’s article in the March edition of Landline, I thought it may be useful to provide some insight into what happened in the great southern agricultural region. Following a mixed start to the season, depending on where farmers were located geographically, by early spring it appeared that the season was on track to deliver a potentially above-average yield in crops. As a result, the majority of crop operations applied the necessary nutrient applications to achieve to above-average yields.
Unfortunately for most in the area, the vital finishing rains did not eventuate, along with a warmer than desired end to the season. The net result was a mix of below-average, average and above-average yields across the major grains of canola, barley & wheat. The upside was above average (decile 8 and 9) grain prices.
Along with cropping, there are also a large number of sheep producers in the great southern. As has been well documented, the sheep price has fallen away significantly since the beginning of 2023, in what’s felt like a cliff face. Wool has been a bit of a mixed bag however whilst being lower than the previous year, it has generally been holding at a more reasonable price level compared to sheep values.
Like all farmers across the board, key input costs such as fertiliser, chemical, plant repairs, fuel, insurance, wages, interest rates & machinery prices have all continued to remain elevated relative to the past two to three years. The overall impact of this has seen farm income closer to the long-term average, whilst the cost price squeeze continues with ongoing elevated operating costs.
This has resulted in an erosion of operating profit which has typically seen operating costs as a % of farm income increasing from a range of 60% to 70%, moving up to the much higher range of 70% to 80%, and in some cases 90% or higher. Once overheads of HP repayments, finance costs (interest & farm leases), personal expenditure, capital expenditure and taxation , most farm businesses generated a negative result.
An interesting side note is that the potential for this result was forecast in many of our annual reviews in early 2023. Noting that this was based on average yields and average prices for crops, the expectation for many that sheep prices were going to be lower, whilst still projecting ongoing elevated input costs and rising interest rates.
It is fair to say that the 2023 result has been challenging for farm businesses and consultants alike. The 2024 annual review meetings have felt a bit like a roller coaster looking at what worked well and what didn’t and not just the overall impact at a financial level but also on a personal level in terms of all the hard work and promising outlook that didn’t eventuate. It is not lost on us when some long-term experienced farmers have indicated that this has potentially been the hardest period for them since they began farming. The return on capital and investment in farming is being challenged in a way that many have never seen before.
Fortunately, with the end of each season, a new one begins, and with this, we can take the learnings from prior years to overlay knowledge, adapt & implement changes for the year(s) ahead. It’s obvious that we can’t control the weather and in many cases the supply/demand that influences the prices for the commodities produced or the input costs that are used. What can be done is to control the controllables.
A key topic of conversation in the annual reviews, has been to manage the production component of the business well. This includes but is not limited to being well planned and organised for each key crop & livestock timing throughout the year. Get crops seeded early and well established with the right application of nutrients & reduced competition from weeds & pests. For sheep think carefully using the evidence available around the timing of lambing that coincides with the most available feed. Leverage your relationships with key marketers, advisors, buyers and suppliers to manage the sale of your commodities and the purchase of key inputs and other costs within the business.
Where appropriate, look carefully within your expenditure lines to ensure that every expense item is working for you. If it is not making or saving you more money than you are spending on that item, or brining benefit to you or your business then think very seriously about not spending that money outright. Every dollar that you don’t need to spend, is saving you a dollar. Ultimately what is being asked this year, is to get the Operating Efficiency back down to levels that will achieve a Profit before Tax and more importantly a surplus after all overheads are paid for (Retained Earnings).
Ideally, the Operating Efficiency should be somewhere closer to 65% or lower but will vary for each business depending on their final overhead costs. This may seem challenging in an ongoing high input cost year, but as last year has shown, we can’t rely on seasonal conditions to give us an average yield & average price and still achieve a net profit before tax unless the costs are controlled accordingly.
Some things to think about in terms of managing your costs include, optimising the efficient use of your fertiliser & chemicals to minimise waste and maximising effectiveness (timeliness and seeking good advice when needed). Managing your labour resources & costs efficiently (the right mix of casuals v full-time particularly at key times of the year). When practical & financially viable, consider the adoption of new technology particularly if it can help improve efficiency and/or reduce costs. Seek out alternative offers from suppliers to help understand comparative costs for like products or services.
As mentioned earlier, the annual reviews in 2023 reflected the impact of ongoing high costs vs average yield & price, and the 2024 reviews are reflecting the same challenge. It’s now important to take into account the reality of 2023 and overlay the risk that without oversight & management of costs, the prospect of the same financial result is very real.
Farmers are a very resilient and adaptable breed, so I know you’ll be reflecting on the annual review discussions and looking to make those important decisions around what money needs to be spent where.
Our team of consultants, agronomists & grain marketers are there to help throughout the year, to provide you with timely information and that all-important sounding board. Please reach out when necessary and best wishes for a successful year of farming ahead.
