abare.gov.au - Australian grains 08.1

Financial performance of grains producers, 2005-06 to 2007-08

Stephen Hooper and ABARE commodity analysts

In recent years climatic conditions have been difficult for the Australian grains industry, with hot and dry conditions adversely affecting grain yields during the critical winter crop establishment and grain development period. At the same time, a tightening of domestic and international grain supplies has resulted in market prices increasing for many of Australia’s key grains and oilseeds. While the former issue has been a major challenge, the latter is likely to present a significant opportunity to boost cropping farm incomes in future years.

In this report, two key issues are analysed. First, the market outlooks for the grains industries are presented and the key market developments affecting the short and medium term price outlook are discussed. Second, detailed estimates of production and farm financial performance are used to highlight the impact of the past two years of adverse seasonal conditions on farm businesses. In particular, the report focuses on grains producers’ financial capacity to fund their recovery from drought, should seasonal conditions permit.

In order to monitor the production and financial performance of the Australian grains industry, the Grains Research and Development Corporation (GRDC) funds a range of survey and analytical research. This report draws heavily on information obtained from grains farms included in ABARE’s Australian agricultural and grazing industries survey, a project partly funded by the GRDC.

Grains outlook to 2008-09

With grain prices remaining high the area sown to winter crops in 2008-09 could increase markedly if seasonal conditions permit. Many livestock producers reduced animal numbers during 2007 as drought continued in many parts of Australia. As prices of replacement livestock are likely to be high during 2008, where seasonal conditions permit, producers are likely to place placing more emphasis on cropping in 2008-09 to secure a quicker recovery in incomes.

The areas planted to the different winter grain crops will depend on the timing and amount of autumn rainfall, expected returns from each crop, and crop rotational issues for individual growers.

World production

High wheat prices in 2007 and early 2008 are expected to lead to a larger area being sown to wheat in many northern hemisphere countries, and in southern hemisphere countries later in the year. On the basis of average seasonal conditions, a recovery in world wheat production is therefore forecast for 2008-09. Global wheat production is forecast to increase significantly in 2008-09 with production increases in the United States and the European Union. In the other major wheat producing countries — China, India and the Russian Federation — production is forecast to remain largely unchanged from the relatively high levels in the previous year.

World coarse grains production (principally corn, barley, oats and sorghum) is forecast to reach 1.1 billion tonnes in 2008-09 — 16 million tonnes higher than the record output of the previous year — reflecting the expectation of continuing strong grain prices. A recovery in coarse grains production in the European Union, Ukraine and Australia will more than offset a forecast decline in US corn production. A return to average seasonal conditions is expected to result in corn production in the European Union increasing by 25 per cent to around 59 million tonnes in 2008-09. Barley production in the European Union is forecast to rise by 8 per cent to 62.3 million tonnes in the same period, reflecting a slight increase in the area planted.

World oilseeds production is forecast to increase by 4 per cent to 405 million tonnes in 2008-09. Production of both soybeans and canola/rapeseed (two of the major oilseeds) is forecast to increase in 2008-09.

In the United States — the world’s largest soybeans producer — the area sown to soybeans is forecast to increase in 2008-09. In the previous year, the area of soybeans declined by around 16 per cent as a record area was planted to corn. However, record soybean prices will help encourage some recovery in area sown to soybeans in 2008-09. Assuming average seasonal conditions, and therefore average yields, soybeans production in the United States is forecast to increase.

Medium term outlook

Prices

The world grain supply and demand balance is expected to remain relatively tight over the medium term. The stocks-to-use ratio for wheat and coarse grains is low, and is projected to remain relatively low over the medium term. The wheat ratio is projected to be around 18 per cent in 2012-13, compared with an average 28 per cent in the early 2000s. The stocks-to-use ratio for coarse grains is projected to be 12.6 per cent by 2012-13, compared with an average 18 per cent in the early 2000s. These low stocks-to-use ratios will help support grain prices over the outlook period.

Over the medium term to 2012-13, prices are projected to remain relatively high. The increased demand for grains and oilseeds to produce biofuels, which is additional to underlying demand for food, feed and other industrial uses, coupled with difficulties in increasing production at the same rate, appears to have shifted prices for grains and oilseeds to a new higher level.

Although productivity improvements in grains production and larger areas planted can be expected to result in increased production of grains over the medium term, market prices are likely to become more volatile. In the past, short term price spikes have usually been linked to production shortfalls, as can happen with poor seasonal conditions in key producing and exporting countries. The low grain stocks and increased demand for grains means abrupt changes in production are likely to be translated quickly into significant price fluctuations.

World production

While strong demand from ethanol production is expected to maintain upward pressure on grain prices over the medium term, there is potential to increase grain supplies through larger planted areas and productivity improvements. World arable land areas have remained relatively constant since the late 1990s, with the increase in grain production largely arising from gains in productivity.

In some regions, including the United States and the European Union, policies have been in place to take land out of production for environmental and conservation reasons. In the United States, around 37 million acres are enrolled in the Conservation Reserve Program, of which 27 million acres would be suitable for growing crops. High grain prices and rising land prices are an incentive to producers to return program land to cropping. It is estimated that most of the land enrolment for 2.5 million acres under the program which expired at the end of 2007 will not be re-enrolled in the program. Over the medium term it is likely, as further contracts expire, that land will return to agricultural production.

The European Union’s Common Agricultural Policy (CAP) has traditionally influenced EU crop production through support prices, planting restrictions, intervention buying and stock management. Under CAP arrangements the percentage of eligible land to be set aside (taken out of crop production) is decided each year. At the end of 2007, the European Union decided to suspend the set-aside policy in 2008, reducing the amount of eligible land to be set aside from 10 per cent to zero per cent. It is estimated that eliminating the set-aside will result in an addition of close to 4 million hectares of land available for cropping. With growing pressure in the European Union to abolish the set-aside land rule, and with concerns about supply and higher grain prices, it is possible the zero per cent rate may continue. Changes to EU set-aside limits will have an important affect on the amount of arable land available for cropping over the medium term.

In 1990-91, Argentina harvested 4.8 million hectares of soybeans, while Brazil harvested 9.8 million hectares. By 2007-08 the areas harvested had increased to 16.8 million hectares in Argentina and 21.5 million hectares in Brazil. It is estimated, in the past year alone, that South America’s share of world soybean production increased from 48 per cent to 53 per cent.

World consumption

With the advent of policy-induced demand for biofuels, the demand for grains and oilseeds is projected to grow strongly over the medium term. In some respects, however, this new biofuels demand element in the market may be somewhat changeable as governments fine-tune policies to reflect community attitudes to issues including the unintended market consequences of current policies, environmental concerns and fuel supply security.

World wheat consumption is projected to increase to 655 million tonnes by 2012-13, compared with 611 million tonnes in 2007-08. Although the volume of wheat used per person appears to be declining, having fallen from an average of 71kg in 2000-01 to around 67kg in 2007-08, total wheat used in human consumption has risen as populations have grown.

Consumption of coarse grains and oilseeds is projected to reach 1.1 billion tonnes and 448 million tonnes respectively by 2012-13. Although the substantial shift in the demand for coarse grains and oilseeds for industrial use, mainly for biofuels, is expected to be maintained over the medium term, traditional uses such as in animal feed and for human consumption are also expected to continue to grow.

Demand growth underpinned by biofuel
expansion

Growth in the biofuels sector represents a major new era of demand for grains and oilseeds and is likely to have a significant impact on world agricultural markets during the projection period. The US Department of Agriculture estimates world biofuel production has tripled since 2000 to around 16 billion gallons in 2007 (61 billion litres), with production concentrated in the United States, Brazil and the European Union. China and Malaysia are also developing biofuel industries. The main feedstocks used in production are corn in the United States, sugar in Brazil and vegetable oils in the European Union.

Government policies supporting biofuels industries have been important in providing incentives for investment as well as reducing the risk and uncertainty associated with volatile output and input prices. The United States provides US51 cents a gallon (US13 cents a litre) tax refund for blenders of ethanol and US$1.00 a gallon (US26 cents a litre) for biodiesel produced from vegetable oil and animal fat. Furthermore, ethanol imports are subject to a 2.5 per cent ad valorem tariff and a specific tariff of US54 cents a gallon (US14 cents a litre). Imports from certain Central American and Caribbean countries are duty free up to a maximum of 7 per cent of the US ethanol market. While the specific tariff is due to expire in 2009, the US Congress has repeatedly extended the tariff, which was first imposed in 1980.

The US Energy Independence and Security Act of 2007 increased the mandate of ethanol used in transport fuels. The previous renewable fuel standard was 5.4 billion gallons (20.4 billion litres) in 2008, rising to 7.5 billion gallons (28.4 billion litres) in 2012. The new standard starts at 9 billion gallons (34.1 billion litres) in 2008 and rises to 36 billion gallons (136.3 billion litres) by 2022.

In the European Union, a biofuels target of 10 per cent of overall transport fuel by 2020 has been set. It is estimated there are currently 185 biodiesel plants operational in the European Union, with a production capacity of 10.3 million tonnes in 2007. Germany is the largest producer of biodiesel in the European Union, accounting for more than half of biodiesel production in 2006. At present the major feedstock used in the European Union to produce biodiesel is canola/rapeseed oil. With the industry in the European Union expected to continue to expand over the medium term, the demand for canola/rapeseed oil is expected to increase.

In Canada the government is developing mandates for renewable fuel use in the transport fuel sector. The government is proposing that, by 2010, 5 per cent of gasoline must be from renewable fuels (ethanol) and, by 2012, 2 per cent of diesel must be from renewable fuels (biodiesel). To encourage renewable fuel production in Canada, the government has introduced incentive payments. Excise tax exemptions for ethanol and biodiesel were eliminated on 1 April 2007 and replaced with production incentive rates of Can$0.10 a litre for renewable gasoline and Can$0.20 a litre for renewable alternatives for diesel. It is estimated that by 2009 ethanol production capacity in Canada will be 1.6 billion litres, while biodiesel production capacity will be 97 million litres.

In China, ethanol production is estimated to have been 1.45 million tonnes in 2007, an increase of around 12 per cent on the previous year. While ethanol production in China is likely to increase over the medium term, the government has revised its biofuels plan. This requires that biofuels will not compete with food production and therefore feedstocks must be grown on marginal land.

Increased demand for feedstocks in the production of biodiesel is also likely in the Republic of Korea. The Korean government has introduced a blend ratio of 0.5 per cent inclusion of biodiesel in petroleum diesel. Currently it is estimated there are 15 biodiesel plants in Korea, with a combined production capacity of around 531 000 tonnes. Over the medium term, biodiesel production is expected to increase to meet the blending requirements.

Australian medium term outlook

Under the assumption of average seasonal conditions, the area sown to grains and oilseeds is projected to average 23.6 million hectares over the five years to 2012-13, compared with an average 22.2 million hectares in the previous five years. The increased cropping area reflects projected higher prices for grains and oilseeds over the medium term.

Competition for cropping land in Australia comes largely from the sheep industry, particularly in the wheat–sheep zone. Since the 1990s the number of sheep in Australia has fallen from around 167 million to an estimated 85 million in 2007-08. Over the same period, the area sown to crops has increased from around 15 million hectares to an estimated 21.4 million hectares. The majority of Australia’s sheep are located in the wheat–sheep zone and it is estimated that numbers in this zone have fallen by around 45 per cent since the 1990s. In the pastoral and high rainfall zones, sheep numbers are estimated to have fallen by 69 per cent and 42 per cent respectively.

Over the medium term the number of sheep in Australia is projected to increase to 96 million by 2012-13. However, at this level, numbers will still be below the number during the early 2000s. The competition for land in the wheat–sheep zone will remain high, as grain prices are projected to remain at relatively high levels over the medium term.

Continued productivity improvements in the grains industry over the medium term mean total grains and oilseeds production is projected to be 48 million tonnes by 2012-13. GM crops are likely to become more widely grown in Australia toward the end of the projection period, following the removal of the ban on GM crops in New South Wales and Victoria. The introduction of GM crops could increase yields for some grain and oilseed crops over time. The projection of grain production incorporates a small improvement in yields from long term trends to reflect the change. The main attraction of GM crops, particularly canola, over the next few years is likely to be reduced growing costs stemming from increased flexibility in weed and pest management.

Farm physical characteristics

During the 2000s, just more than 28 000 broadacre producers in Australia sowed more than 100 hectares to crops per year on average (table 1). However, there is considerable variability in broadacre producers’ cropping intensity, resulting in markedly different financial performance among these producers.

In order to investigate the physical characteristics and financial performance of broadacre producers with different levels of cropping intensity, producers surveyed by ABARE have been classified into four groups on the basis of their dependence on cropping receipts:

low intensity — farms that generate less than 20 per cent of receipts from crops

medium intensity — farms that generate 20–50 per cent of receipts from crops

high intensity — farms that generate 50–80 per cent of receipts from crops

very high intensity — farms that generate more than 80 per cent of receipts from crops.

Low intensity cropping farms represent around 20 per cent of broadacre producers who, on average, sowed more than 100 hectares of crops during the seven-year period to 2006-07 (table 1). They accounted for 10 per cent of the total area sown to crops but just 2 per cent of broadacre cropping receipts over the period. Low intensity cropping farms are generally large (in terms of area operated), highly diversified businesses, with relatively large sheep and beef cattle enterprises (table 2). These farms are concentrated in the pastoral and high rainfall zones where producers’ cropping options are restricted by agro-ecological conditions.

In contrast, more than half of the broadacre cropping farms were classified as being high or very high intensity cropping farms during the 2000s. These producers collectively accounted for 74 per cent of the area sown to crops during this period and 86 per cent of the value of crop sales (table 1). More than 90 per cent of these producers are located in the wheat–sheep zone and operate, on average, around 2000 hectares, less than half the size of the average low intensity cropping farm (table 2). While cropping is the most important agricultural activity undertaken by high and very high intensity cropping farms, these farms also have sheep and beef cattle enterprises.

As cropping intensity increases, producers plant a greater number of different crops and increase their focus on higher value food and feed crops. The proportion of the area sown to wheat and pulses increased with cropping intensity. In contrast, the proportion of crop area planted to oats decreases as cropping intensity increases. The area sown to barley and oilseeds was similar for producers of all levels of cropping intensity, averaging around 18 per cent and 7 per cent of the total area sown respectively. However, in the case of barley, the proportion of the area sown to malting barley increased with cropping intensity, resulting in a steady increase in the average barley price received. Also, grain yields for all crops increased with cropping intensity during the period from 2000-01 to 2006-07 (table 2).

Farm performance 2006-07 and 2007-08

Crop and livestock production

In 2006-07, drought conditions throughout much of Australia’s grains-producing regions resulted in many producers planting less land to crops. Hot and dry conditions during the critical crop establishment and development period led to most crops realising poor grain yields and, in some cases, complete crop failure. Where grain yields were below economically viable levels, producers were able to recoup some of their costs by grazing off the grain that had been produced or by bailing the crop for hay.

Ideal planting rains for the 2007-08 winter crops resulted in a sig-nificant increase in the area sown. However, a return to hot and dry conditions during late winter and spring adversely affected crop development. While many producers are projected to realise poor grain yields again in 2007-08, they are expected to out perform 2006-07 grain yields. Consequently, winter grain production is projected to recover in 2007-08.

Good late spring and summer rainfall in the key summer grains-producing regions of Queensland and northern New South Wales is projected to result in a large increase in crop plantings during 2007-08, particularly in the case of sorghum.

The total quantity of grain and hay sold in 2007-08 is projected to increase by less than the quantity produced, as many producers — particularly farms with significant livestock enterprises — appear to be replenishing on-farm stocks of grains and hay. However, changes in the seasonal outlook and market conditions during the remainder of 2007-08 could result in producers selling more grain than indicated at the time of the survey (conducted in November 2007).

The improvement in seasonal conditions since spring in much of Australia’s agricultural zone is also projected to result in a marked increase in the quantity and quality of pasture production in 2007-08. Many producers expect to reduce livestock turnoff in response to the improvement in seasonal conditions. Broadacre cropping producers are projected to increase the numbers of both sheep and cattle in 2007-08, rather than purchasing additional animals.

Financial performance

2006-07

In 2006-07, total cash receipts among broadacre cropping farms fell, on average, by 14 per cent as a result of the drought reducing crop receipts. Total cropping receipts fell by 32 per cent to average almost $200 000 a farm, as reduced grain production more than offset the impact of increased grain prices. Livestock receipts are estimated to have increased, on average, by 5 per cent to $177 000, principally because of higher wool receipts. Wool receipts are estimated to have increased by 30 per cent as a result of higher prices and increased sales. Producers responded to a 16 per cent rise in wool prices, and tightening cash flows, by running down on-farm stocks of wool in order to boost the volume of wool sold. Receipts from the sale of beef cattle, sheep and lambs are estimated to have fallen as the drought reduced lamb and calf production and increased turnoff of unfinished and young livestock caused producers to receive lower prices.

Farm cash costs fell, on average, by 9 per cent in 2006-07 as reduced crop production resulted in producers purchasing fewer cropping inputs, particularly fertilisers, chemicals and fuel. However, tightening on-farm feed supplies forced many producers to increase purchases of fodder.

Poor cash flows during 2006-07 resulted in many cropping producers increasing their working capital debt, particularly to purchase the inputs required to sow the 2007-08 winter crops. This, combined with higher interest rates, resulted in cropping producers increasing outlays on interest payments by 34 per cent to around $51 000 a farm, making interest payments the largest cost item in 2006-07 (table 3).

With receipts contracting by more than costs, farm financial performance deteriorated markedly during 2006-07. Farm cash incomes fell, on average, by 38 per cent to $60 000 a farm. Lower farm cash incomes, combined with a rundown in the value of farm trading stocks, resulted in the average farm business recording a loss of almost $83 000 a farm in 2006-07. This is the largest average farm business loss recorded by cropping farms since ABARE commenced its survey of broadacre farms in 1977-78 (figure c).

3	Financial performance indicators, by cropping intensity Average per farm

low

medium

high

2005-06

2006-07 p

2007-08 s

2005-06

2006-07 p

2007-08 s

2005-06

2006-07 p

2007-08 s

Total cash receipts

Total crop receipts

26 624

15 750

(10)

15 500

122 213

154 730

(11)

155 100

335 619

339 810

(7)

360 700

– wheat

7 655

7 530

(15)

8 300

60 518

60 930

(15)

85 600

185 437

164 570

(9)

215 300

– barley

4 979

3 170

(18)

3 300

21 527

27 690

(17)

27 400

59 521

74 770

(12)

71 700

– sorghum

1 591

940

(62)

4 166

7 360

(47)

7 258

5 400

(34)

– legumes

585

370

(43)

4 248

8 280

(48)

19 461

19 410

(14)

– oilseeds

2 328

1 510

(78)

11 511

9 890

(27)

27 492

26 950

(29)

Sheep and lambs

77 423

80 360

(8)

62 900

69 657

57 150

(10)

78 300

56 889

52 820

(7)

56 700

Beef cattle

319 552

146 500

(17)

107 700

50 691

65 540

(20)

44 000

23 111

13 240

(30)

24 700

Wool

58 246

64 920

(8)

58 100

46 413

63 860

(11)

80 900

37 391

48 100

(10)

51 000

Total cash receipts

529 393

383 880

(9)

341 800

347 984

410 170

(10)

420 800

504 307

504 140

(7)

536 200

Total cash costs

Contracts

15 998

10 070

(11)

13 644

14 660

(20)

23 778

13 520

(16)

Crop and pasture chemicals

7 103

14 820

(16)

18 500

19 261

26 420

(11)

34 100

45 081

54 240

(8)

38 800

Fertilisers

19 701

25 910

(16)

24 000

29 986

45 520

(11)

48 100

58 228

65 640

(8)

57 200

Fodder

38 376

40 260

(17)

19 000

6 742

11 080

(26)

6 600

3 261

4 440

(32)

2 200

Fuel, oil and grease

27 129

27 760

(8)

27 400

27 081

34 990

(13)

42 100

41 378

40 590

(7)

32 300

Handling and marketing

4 222

2 300

(10)

5 500

5 985

2 620

(18)

7 600

22 121

5 200

(14)

16 000

Interest

37 975

53 230

(9)

56 700

28 333

43 130

(14)

55 600

40 030

59 150

(12)

50 500

Repairs and maintenance

32 545

30 840

(7)

30 600

28 342

34 070

(9)

34 400

32 701

35 860

(11)

34 400

Wages for hired labour

18 621

15 710

(15)

10 200

10 348

14 810

(22)

17 900

12 313

11 780

(16)

12 000

Total cash costs

424 716

369 370

(8)

307 600

279 565

350 150

(10)

354 600

421 523

410 950

(7)

351 700

Farm financial performance

Farm cash income

104 677

14 520

(126)

34 200

68 418

60 010

(30)

66 200

82 785

93 190

(21)

184 500

Farm business profit

5 781

– 123 210

(17)

– 93 600

– 17 262

– 78 930

(24)

– 62 800

– 13 195

– 61 810

(35)

71 300

Rate of return a

– excl. capital appreciation

1.1

–1.3

(34)

–0.7

0.5

–0.6

(1)

1.1

0.3

(137)

3.9

– incl.capital appreciation

12.1

9.5

(23)

3.5

6.2

(5)

5.2

4.3

(38)

very high

Australia

2005-06

2006-07 p

2007-08 s

2005-06

2006-07 p

2007-08 s

Total cash receipts

Total crop receipts

649 681

424 930

(24)

745 900

290 001

198 140

(10)

309 900

– wheat

330 092

212 390

(10)

480 700

152 187

93 940

(6)

191 500

– barley

99 773

89 150

(14)

122 500

48 672

41 310

(8)

55 100

– sorghum

23 132

17 140

(11)

8 446

6 300

(16)

– legumes

44 071

50 060

(16)

17 060

15 500

(12)

– oilseeds

30 833

10 310

(55)

20 184

11 200

(20)

Sheep and lambs

23 847

11 110

(22)

23 300

57 370

56 310

(5)

55 100

Beef cattle

16 322

3 310

(61)

5 200

71 977

70 540

(13)

47 700

Wool

15 584

7 730

(35)

18 700

38 919

50 570

(5)

51 600

Total cash receipts

736 938

472 870

(22)

822 900

507 559

434 970

(6)

523 600

Total cash costs

Contracts

27 799

16 150

(39)

20 661

13 010

(11)

Crop and pasture chemicals

75 786

57 330

(11)

63 200

38 175

34 560

(6)

37 700

Fertilisers

86 494

69 830

(18)

79 600

50 159

47 760

(7)

51 100

Fodder

1 061

1 730

(75)

700

8 858

18 180

(14)

7 500

Fuel, oil and grease

59 472

37 130

(16)

42 300

38 725

34 180

(5)

35 100

Handling and marketing

38 524

5 070

(41)

31 800

18 148

3 570

(12)

15 000

Interest

48 427

45 490

(28)

50 600

38 100

51 090

(7)

53 300

Repairs and maintenance

47 147

30 100

(29)

38 400

34 089

32 670

(6)

34 200

Wages for hired labour

23 032

8 590

(307)

12 900

14 608

13 300

(36)

12 800

Total cash costs

570 819

367 870

(26)

423 700

410 599

375 080

(6)

356 200

Farm financial performance

Farm cash income

166 120

105 010

(22)

399 200

96 960

59 880

(16)

167 500

Farm business profit

49 449

– 36 570

(75)

290 500

– 373

– 83 050

(13)

48 000

Rate of return a

– excl. capital appreciation

2.7

0.6

(137)

9.5

1.3

–0.5

(57)

– inc. capital appreciation

4.5

(38)

7.1

(15)

a Rate of return to farm capital at 1 July. p Preliminary estimates. s Provisional estimates.
Note: Figures in parenthesis are relative standard errors (rse) expressed as a percentage of the estimate. The larger the sample size, the lower the rse is likely to be.

Financial performance by cropping intensity

Historically, farm financial performance increases with cropping intensity, largely because farm cash receipts increase at a faster rate than cash costs as cropping intensity increases (table 2, figure c).

The main factor driving this is the tendency for area sown, grain yields and grain prices to all increase with cropping intensity (table 2).

In 2006-07, farm financial performance deteriorated among cropping farms of all intensity levels in 2006-07. However, the historical trend for performance to strengthen with cropping intensity remains apparent (figure d).

Very high intensity cropping farms realised an average farm cash income of $105 000 a farm in 2006-07, 36 per cent lower than in the previous year, and a farm business loss, on average, of $37 000 (table 3, figure d). This ended a 15-year period where very high cropping intensity producers realised significant farm business profits, averaging almost $71 000 a year a farm. Reflecting this, producers’ rate of return on capital and management (excluding capital appreciation) was only 0.6 per cent, well below the average of 5 per cent realised in recent years (figure e).

Low intensity cropping farms realised a return on capital of –1.3 per cent as the drought significantly reduced grain and livestock production. With receipts falling by more than costs, farm cash income fell by 86 per cent and the average producer realised a farm business loss of around $123 000 a farm.

2007-08

Grain producers are projected to realise a 20 per cent increase in total cash receipts in 2007-08, as a recovery in cropping receipts is likely to more than offset lower livestock receipts. Increased production and prices are projected to result in total crop receipts rising by 56 per cent in 2007-08. However, rebuilding of livestock numbers is projected to cause total livestock receipts to fall, on average, by 13 per cent on grains farms in 2007-08.

Total cash costs are projected to fall by 5 per cent as a result of reduced outlays on purchased fodder. Higher input prices and increased crop plantings are expected to increase outlays on crop inputs, in particular fertilisers, chemicals and fuel. Increased grain and hay production and sales are expected to significantly increase handling and marketing expenses.

With receipts rising relative to costs, farm cash income in the grains industry is projected to more than triple to average $167 500 a farm. This, combined with an increase in the value of farm trading stocks (because of producers rebuilding livestock numbers and replenishing grain and hay stocks), is projected to result in the average grains producer’s recording a farm business profit of $48 000, after realising sizable losses in 2006-07.

In 2007-08, the recovery in financial performance is projected to differ markedly among grains producers of differing cropping intensities. For producers with high or very high cropping intensity, 2007-08 is projected to be a year of financial recovery (figures e and g, table 3). The proportion of these producers projected to realise farm business profits is expected to more than double to 75 per cent in 2007-08. Among producers with a very high cropping intensity, the proportion of farms earning a business profit in excess of $500 000 is projected to jump from 2 per cent in 2006-07 to 16 per cent in 2007-08.

In contrast, producers with low cropping intensity are projected to realise only a modest improvement in farm financial performance in 2007-08, with the proportion of farms realising a business profit increasing from 15 per cent in 2006-07 to 18 per cent in 2007-08. Since 2002-03, these producers’ incomes have been adversely affected by reduced grain and hay production, lower livestock production resulting from extensive destocking, and increased reliance on purchased fodder during a period of high grain and hay prices.

Financial performance per hectare operated

Expressing farm cash income on a ‘per hectare operated’ basis enables a comparison of the financial performance of farms after the effect of different scales of operation is taken into account. Income per hectare operated increases significantly with cropping intensity as farm cash receipts per hectare increase faster than costs (figure g). In the 10 years to 2006-07, farm cash income per hectare operated rose from an average of just $15 among low intensity cropping farms to $96 among very high intensity cropping farms.

In 2007-08, very high intensity cropping farms are projected to experience a strong recovery in grain receipts, resulting in well above average incomes per hectare, averaging $200 a farm. In contrast, low intensity cropping farms are projected to realise an average farm cash income of $11 per hectare a farm, well below the 10-year average but above the 2006-07 average of just $4 per hectare a farm.

Recovering from drought

Producers’ ability to increase incomes following the recent droughts will be influenced by the combined impact of past investments boosting farm size and productivity and producers’ access to funds to expand crop and livestock production. Producers’ funding options include using their farm business cash flows, debt facilities, farm liquid assets and off-farm income sources.

Capital investments

New investments are an important means of boosting farm productivity and incomes, with productivity growth providing better prospects for farm business viability in the longer term. From the mid-1990s to 2002-03, a historically large proportion of broadacre producers acquired land to expand the scale of their farm operations. However, since then, lower farm incomes owing to drought and significant increase in land values has resulted in a fall in the proportion of farms acquiring land (figure h).

In recent years, purchases of new capital have been relatively volatile, largely reflecting volatility in farm incomes because of recurring droughts across parts of Australia. Although the proportion of farms acquiring land has fallen in recent years, average a farm expenditure on land acquisitions has increased as a result of higher land prices.

In 2006-07, capital purchases averaged $120 000 a farm among grains producers (figure i). Low intensity cropping farms have invested proportionally more to purchase land in recent years, while high and very high intensity cropping farms have focused on acquiring both land and plant and machinery.

Use of farm debt

The historically high level of capital investment undertaken in recent years has been associated with a significant increase in farm debt levels (figure j). Debt for land and other purposes, principally to purchase plant, machinery, buildings and other structures, has increased steadily since the late 1990s. Since 2002-03, however, poor seasonal conditions over several years have adversely affected farm cash flows and forced many producers to increase their debt for working capital — that is, producers borrowed funds to finance the daily operation of their farm business. Since 2000-01, farm debt has increased by 145 per cent to average $700 000 per cropping farm. Farm debt has increased on farms of all levels of cropping intensity during this period.

The growth in farm debt has resulted in a steady increase in cropping producers’ debt servicing commitments (figure k). In 2006-07, higher debt levels and rising interest rates resulted in the average cropping producer using 12 per cent of farm receipts to pay the business’s interest obligations. Low intensity cropping farms had the highest debt servicing obligations, averaging around 14 per cent of receipts in 2006-07.

In 2007-08, a recovery in cash flows is projected to enable many producers to reduce debt and interest payments, resulting in debt servicing commitments falling to average around 10 per cent among cropping producers (figure k). However, the situation is projected to be markedly different for low and medium intensity cropping farms in 2007-08. Debt servicing commitments are projected to be higher in 2007-08, as these producers expect to rebuild livestock numbers rather than reduce debt levels.

Use of liquid assets

During the 1990s and early 2000s, a steady rise in farm cash incomes and profitability enabled many producers to build up their liquid assets, peaking at an average of $180 000 per cropping farm in 2003-04 (figures d and l). Since then, adverse seasonal conditions over a number of years and lower farm incomes have resulted in many producers reducing liquid assets in order to limit the resultant increase in farm debt. This was particularly apparent during the 2006-07 drought, when liquid assets fell by 31 per cent to average $108 000 a farm.

In 2007-08, a strong recovery in farm profitability and cash inflows is expected to enable many producers who operate high and very high cropping intensity farms to rebuild farm liquid assets. However, continued tight cash flows and poor profitability among low and medium intensity cropping farms are likely to limit these producers’ ability to replenish liquid assets during 2007-08.

Capacity to recover

The grains industry is in a relatively strong position to recover and even boost production beyond pre-drought levels if seasonal conditions improve. The recent history of many producers undertaking high levels of new investments in land and capital should enable producers to expand production and boost productivity.

In 2008-09, cropping producers’ funding options to realise this potential if seasonal conditions permit differ with cropping intensity.

Among high and very high cropping intensity farms the strong recovery in financial performance and cash inflows in 2007-08 is likely to enable many of these producers to use surplus funds to expand crop plantings and livestock numbers in 2008-09, with limited need to increase long term debt.

For low and medium cropping intensity farms, expansion of crop plantings and rebuilding of livestock numbers will pose financial challenges. However, most of these cropping farm businesses still retain considerable liquid assets that can be used to help fund the farm during this period (figure m). Also, the steady rise in farm land values over the past decade has sustained high equity levels despite farm debt increasing steadily during this period. So long as land values remain high, many low and medium intensity cropping farms have some capacity to take on additional debt to also assist in funding their recovery and future expansion. While this is likely to increase their debt servicing commitments in the short term, the resultant increase in incomes should facilitate a reduction in this burden and enable some rebuilding of liquid assets in coming years.

Productivity growth

Total factor productivity growth in Australia’s broadacre industries is highly variable on a year-to-year basis, but has generally trended up over the past decade. Between 1977-78 and 2005-06, broadacre producers’ productivity growth averaged 1.5 per cent a year, with cropping and mixed livestock-cropping farms recording the highest annual growth in productivity (table 4).

Productivity growth can be driven by producers generating the same amount of output with reduced inputs, increasing output with the same level of inputs or increasing output at faster rate than inputs. Over the past three decades, cropping farms in Australia realised an annual productivity growth rate of 2.3 per cent. This was the result of producers increasing output by 3.7 per cent but increasing inputs by only 1.4 per cent. In contrast, mixed livestock-cropping farms realised productivity growth of 1.7 per cent a year by boosting production by 0.3 per cent while using 1.3 per cent less in inputs.

While productivity growth within the Australian cropping industry is fairly similar among regions, the factors driving it differ markedly (table 5). Producers in the western and southern agro-ecological regions, defined by the Grains Research and Development Corporation, realised strong growth in farm outputs as well as some input growth. In the northern agro-ecological region productivity growth was the result of more modest growth in output, accompanied by a reduction in overall input use.

4	Average annual input, output and TFP growth in broadacre and dairy industries 1977-78 to 2005-06

input

output

TFP

growth

Total broadacre

–0.5

1.5

Cropping

1.4

3.7

2.3

Mixed crop-livestock

–1.3

0.3

1.7

Beef

1.4

Sheep

–1.6

–1.3

0.3

Dairy a

5.1

1.2