Managing the level of drought impact on agribusiness
This edition of the Agribusiness Bulletin looks at how drought-affected Australian farmers might manage drought impacts and strive towards a longer-term focus on sustainability.
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Managing the level of drought impact on agribusiness
With such a variable climate, Australia is without a doubt one of the harshest environments in which to farm on earth. While there is always room for improvement, the agricultural sector is one of the most efficient in the world – yet it is still subject to major questions regarding its long-term viability.
Based on Australian Bureau of Agricultural and Resource Economics and Sciences (ABARES) estimates, the average Australian farmer made a return of just over 2% in 2017-18, excluding capital gains. While this number will call into question viability, it must be remembered that this is broad view and includes large ranges from the top 25% who enjoy much higher returns to ‘hobby’ farmers who see the enterprise more as lifestyle and is in many cases supported by off-farm income.
Recent drought conditions across Australia’s east have brought this into even sharper focus with 100% of NSW, and two-thirds of Queensland, officially being ‘drought declared’. Drought impacts are certainly felt by cattle farmers, which account for most of Queensland’s agricultural production and the largest proportion of the national cattle herd.
Working with farmers during difficult times
Deloitte’s Restructuring Services team has been working with drought-affected cattle farmers and operations battling variable weather conditions. When it comes to the cattle industry, drought has multiple effects on farmers:
- Disappearing pastures force farmers into the market to buy feed that is usually only economic when used for intense farming operations, such as feedlots. For grazing properties, it only maintains the livestock, and isn’t profitable.
- Unfortunately, the need for feed coincides with the precise moment that feed crops are in short supply due to drought, and supply is low. Feed prices rise in these conditions, or feed has to be trucked longer distances, further increasing costs.
- Cattle reliant on dam water can struggle in the conditions, often getting bogged in mud as they try to get closer to the water, and just as often too weak to get themselves out.
- Without grasses to feed on, cattle are forced onto other plant matter. In North Queensland, for example, this can push them towards the dreaded and highly toxic ‘heart leaf’.
- As farmers destock, and supply of cattle to saleyards and abattoirs increases, prices are pushed down.
- Generally, stock lose condition, mortality rates rise, and surviving animals have lower weights and deliver lower returns to farmers.
What can farmers, and their stakeholders, do?
There are a number of steps that can be taken to manage drought impacts:
- Farmers should engage with their stakeholders. When their businesses are in distress, many farmers close up, not wanting to admit they may be failing or are in trouble. We have been witness to a number of really great outcomes with distressed farms, even when their debt is far higher than the value of the property. The key ingredient of success was the farmer working with the bank on a joint solution, including accessing bank drought assistance packages.
- Stakeholders should be cognisant of the cycle. This doesn’t mean every situation is retrievable, but there does need to be some serious thought given to separating poor business practices from cyclical effects. Supporting a good business person through a difficult period at the bottom of the cycle can mean a loyal customer for life.
- Focus on cash flow. For too long there has been a reliance on capital gain to make money in farming. Cash flow is what counts, and (farm valuers take note) the sooner we use that as a measure, the better.
- Invest, bank, supply and operate across the cycle – and take the longer view. Too often, reliance is placed on one or two years of results (both good and bad). But longer range views are required. This includes gearing properties so they can continue through a drought and have resources for the hard times. Those that survive put a reserve aside in the good years, if they can.
Agriculture is clearly a vital and growing part of our economy and is one of the most successful sectors of the Australian economy in recent times. In the current drought, the focus needs to be on providing the right kind of help at the right time, but at the same time, having the longer-term focus on sustainability. This is so Australian agriculture can continue to take advantage of the growing global demand for high quality food and fibre.
Deloitte is a committed supporter of the Red Cross Aussie Farmer Appeal.
Richard Hughes, Partner, Financial Advisory.
Published: November 2018