What do farm cash incomes and debt trends mean for your business?

The Agribusiness Bulletin

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What do farm cash incomes and debt trends mean for your business?

Each year, the Australian Bureau of Agricultural and Resource Economics and Sciences (ABARES) releases insights into the financial performance of Australian farms, utilising survey and interview data from nearly 2,000 farm operators. This year’s report includes FY13 (actual results), FY14 (preliminary results) and FY15 (provisional estimates). The data distinguishes between commercial-scale dairy farms and all other farms, so called 'broadacre industries', and in this edition of the Agribusiness Bulletin we take a closer look at farm cash incomes (being total cash receipts less total cash costs) and high-level trends in farm debt.

Farm cash incomes

The most recent farm survey report paints an improved picture for broadacre farms with farm cash incomes continuing to exceed long-term averages as a result of:

• Generally speaking, a good wheat crop for WA and SA in FY15 (noting this period includes the crop income received in FY15 (i.e. 2014 winter crops and 2014/2015 summer crops) and more broadly, favourable seasonal conditions and market prices for the broadacre sub-sectors (livestock and mixed farms)
• 2% decline in farm costs, particularly fuel (and associated freight costs) and lower interest payments.

The dairy industry has not had it quite so good:

• Expenditure on fodder, grain and fertiliser in an effort to lift production and take advantage of higher milk prices in FY14 resulted in a relative over-supply of milk into FY15, and ultimately lower milk prices
• Whilst interest rates, fuel and cattle prices were lower, the decreases were not enough to offset the lower farm receipts, so farm cash incomes are forecast by ABARES to be considerably lower in FY15.

A summary of the cash incomes and commentary is shown below. 

Farm debt

Reserve Bank of Australia data, as published by the Australian Bureau of Statistics, confirms that collective Australian rural bank debt reached a new peak in December 2014 (the latest official figures date) of $60.7 billion. This reflects an additional $80 million in bank debt on the previous peak (a year earlier, 2013). Additionally, $2.4 billion in rural debt is issued through government programs (also a new record high) and also $1.5 billion of rural debt through the pastoral houses (this is the lowest level in 15 years, reflecting the structural changes in rural banking as typified by the pre-GFC lending environment and formation of RuralBank via the Elders pastoral book).

Total rural debt is just over $64.5 billion. This is more than three times the total rural debt of 15 years ago. 

ABARES definition of farm cash incomes specifically excludes capital payments and payments to family workers (so is not a measure of pure profitability, for example), and around 1 in 5 farms across Australia are likely heading for negative cash incomes in FY15. This provisional estimate by ABARES is broadly similar proportion to the previous two years, but has that consistency of operating losses resulted in increased indebtedness? Well, it depends on your geography and commodity.

ABARES estimates that 40% of farms actually reduced their indebtedness in FY15, primarily paying down debt from operating cash surpluses but also some asset sales. Farm debt for drought-affected producers rose by 5% in FY15, whilst non-affected producers were able to reduce indebtedness by 1%. The geographic sectors with increased indebtedness correlate closely to those sectors that are feeling the effects of ongoing dry seasonal conditions – such as western and northern Queensland and northern inland New South Wales - with increased indebtedness used to cover operating losses or purchase additional land (presumably offering better pastures, waters or geographic & seasonal diversification). Last year’s excellent wheat crop for WA and SA, and a second strong year for Barkly Tableland (NT) graziers have flowed through to lower average debt levels for wheat and beef industries, likely masking the poorer returns from other primary producers in those sectors but located in other (drier) geographies. 

• Around 70% of total broadacre debt is held by 12% of farms
• More than a third of WA broadacre farms and more than a fifth of NT farms have more than $1million farm debt
• Nearly half of the total dairy sector debt is held by just 9% of dairy farms
• A quarter of dairy farms have more than $1million farm debt.

Farm debt

Source: ABARES Australian farm survey results 2012-13 to 2014-15, Deloitte analysis

These sectors and geographies are therefore more exposed to adverse interest rate movements (for example) but are also more likely to benefit from scale (purchasing power and off-take agreements, for example). Given our record low interest rate setting, a key scenario for farm business planning is therefore an eventual return to higher interest rates:

• Could the business support higher interest payments on the current debt level?
• What is the maximum preferred level of debt that the farm could support, should interest rates turn higher?
• In a higher interest rate environment, could the farm business raise additional debt should circumstances change – poor seasonal conditions, emergency property repairs, or external market shock?
• What proportion of farm receipts should your business be directing to interest payments?

If answering these questions for your farm business makes you uncomfortable or the answers are less than flattering, now is the time to form a plan of action around profitability and productivity gains as a hedge against higher interest rates.

A copy of the ABARES Australian farm survey results 2012-13 to 2014-15 report can be downloaded from the ABARES website. 

Author

Jackie White