Financial performance of grains producing farms 2006-07 to 2008-09

In recent years, the grains industry has faced significant challenges, with seasonal conditions adversely affecting crop production and grain quality. Financial performance reached a historical low in 2006-07. However, with an improvement in seasonal conditions for many crop producing regions in 2007-08, yields improved dramatically, resulting in higher production and improved financial performance.

Two key issues are analysed in this report:

• market outlooks for the grains industry including key market developments affecting the short and medium-term price outlook.
• profile and farm financial performance of grains farms using ABARE farm survey data to highlight the current financial situation of the grains industry. The ability of the industry to improve productivity and expand production in the future is presented as part of the analysis.

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 survey partly funded by the GRDC.

Grains outlook to 2009-10

Despite a forecast decline in world grains and oilseed prices in 2009-10, average prices remain above those received in the late 1990s. Both world production and consumption of grains and oilseeds are forecast to decline from the previous year’s record.

The area planted to different winter grain crops in Australia will depend on the timing and amount of autumn rainfall, expected returns for each crop and rotational issues for individual growers. The area planted to winter crops is forecast to decline by 3 per cent in 2009-10, largely reflecting the forecast lower price outlook.

World production

Global wheat production is forecast to decline in 2009-10 as yields decline from last year’s record levels. World wheat production in 2009-10 is forecast to be 632 million tonnes, down around 55 million tonnes from the previous season’s record 687 million tonnes. The decline in production is forecast for the five major producers: China, the European Union, India, the Russian Federation and the United States. Yields in all five countries were above average in 2008-09 as seasonal conditions were favourable.

World coarse grain production is forecast to decline to 1.07 billion tonnes in 2009-10, a decline of 27 million tonnes from the record output of the previous year. This decline largely reflects the prospect of attaining average yields, compared with record yields in 2008-09. However, carryover stocks from the previous year are expected to maintain supplies at close to record levels.

World oilseed production is forecast to fall by 3 per cent in 2009-10. Soybeans account for around 57 per cent of total world oilseed production, with the United States, Brazil and Argentina being the largest producers. In 2008-09, yields in Brazil and Argentina are expected to be above the longer term average. Despite a forecast increase in the area planted to soybeans in these countries in 2009-10, production is forecast to decline as yields return closer to historical averages.

World consumption

Wheat consumption is forecast to fall from 648 million tonnes in 2008-09 to 628 million tonnes in 2009-10. Reductions in wheat consumption in 2009-10 are expected to be driven by a decline in the use of wheat for livestock feed. Food wheat consumption over recent years has increased by around 1 per cent a year. The use of wheat for livestock feed increased to a record 117 million tonnes in 2008-09, largely because of a rise in feed wheat consumption in the European Union. In 2009-10, EU feed wheat consumption is forecast to fall as livestock production declines.

World coarse grain consumption is forecast to decline by 9 million tonnes to 1.07 billion tonnes in 2009-10, reflecting reduced demand for feed grains as livestock production contracts in response to weaker demand for livestock products and lower biofuels demand.

The global financial crisis and the sharp decline in oil prices since mid-2008 have significantly reduced profitability in the US ethanol industry, with plants being closed and plans to construct additional distilleries being shelved. While these developments have the potential to lower the supply of ethanol and therefore the need for coarse grains as a feedstock over the next year, an increase in the use of ethanol has been mandated under the Energy Independence and Security Act of 2007. The Renewable Fuel Standard has been set at 10.21 per cent for 2009, ensuring that 11.1 billion gallons (42 billion litres) of renewable fuel would be blended into transportation fuel. If the Renewable Fuel Standards are binding, there is likely to be another large increase in the use of corn for ethanol, around 12 per cent, in 2009-10.

World oilseed consumption is forecast to decline by 9 million tonnes in 2009-10, as the derived demand for oilseed products falls. Oilseed meal consumption is forecast to decline by 3 per cent in 2009-10 and vegetable oil consumption by 2 per cent.

The demand for oilseed meal is forecast to decline in 2009-10, as the demand for meat is forecast to slow. The assumed sharp slowing of world economic growth in 2009 will have a dampening effect on the demand for meat-based products, particularly in developing economies. Assuming economic growth recovers in 2010, the demand for oilseed meal is likely to increase in the latter half of the 2009-10 financial year. The use of vegetable oil for industrial purposes (primarily biodiesel) has increased from 8.6 million tonnes in 2000-01 to an estimated 24.8 million tonnes in 2008-09. The increase has been the result of government mandated blending targets. However, vegetable oil for use in biodiesel production is forecast to ease, as lower oil prices have reduced the demand for blended fuels.

Medium-term outlook

Prices

World grain and oilseed prices are projected to remain relatively high over the medium term (figure a). Relatively low grain stocks and increased demand, particularly for biofuels production, are expected to provide some support to grains prices over the projection period.

Grain stocks have been relatively low for the past few years, and despite increasing in 2008-09, are still low by historical standards. The stocks to use ratio for wheat is projected to be around 20.3 per cent in 2013-14, compared with 23.9 per cent in 2008-09, 28.1 per cent in the early 2000s and 31.6 per cent in the late 1990s. The stocks to use ratio for coarse grains is projected to decline over the five years to 2013-14, to 14 per cent, compared with 16.6 per cent in 2008-09. These low stocks to use ratios will provide support to grain prices over the outlook period.

Expected productivity improvements in grains production will result in increased volumes of grains being produced over the medium term. In the past, short-term price spikes have been linked to production shortfalls in key producing and exporting countries. Low grain stocks and increased demand for grains mean abrupt changes in production are likely to be translated quickly into significant price fluctuations.

World supply

Since the 1970s, the area planted to grains has remained fairly constant at around 546 million hectares. Over the same period, the area under oilseeds has increased by an average of 3 per cent a year. Production of grains and oilseeds has increased over this period mainly because of productivity improvements. Wheat and coarse grains production has increased by an average of 2 per cent a year since the 1970s. Production of oilseeds has increased at an average rate of nearly 5 per cent a year since the 1970s. Over the medium term, it is expected that with continued productivity improvements, production will continue to rise. Wheat production is projected to increase to 661 million tonnes in 2013-14, coarse grains to 1.1 billion tonnes and oilseeds to 445 million tonnes.

European Union

Grain yields in the European Union are among the highest in the world. However, over recent years, seasonal conditions have been less than ideal and average yields have declined. In the five years to 2007-08, wheat, barley and corn yields in the European Union declined by an average of 3.4 per cent, 0.7 per cent and 1.2 per cent a year, respectively. In 2008-09, with favourable growing seasonal conditions, grain yields increased to well above their longer term averages.

Canola/rapeseed yields in the European Union are some of the highest in the world. On average over the past five years, yields in the European Union have been 3 tonnes a hectare compared with 1.78 tonnes a hectare in China and 1.62 tonnes a hectare in Canada. As demand for biodiesel is expected to remain strong in the European Union over the medium term, prices for canola are likely to remain favourable. The price outlook is expected to encourage increased areas to be planted to canola/rapeseed in the European Union.

Over the medium term, with continued productivity improvements in the European Union, production of grains and oilseeds is likely to increase.

Argentina and Brazil

The area under crops has increased in Brazil and Argentina during the past 20 years, particularly the area of soybeans. In Brazil, the area of soybeans has increased from around 12 million hectares in 1988-89 to 21.3 million hectares in 2008-09. In the same period, the area planted to soybeans in Argentina increased from 4 million hectares in 1988-89 to 18 million hectares in 2008-09.

Over the medium term there is potential for Brazil and Argentina to increase grains and oilseeds production through area increases and continued productivity improvements. However, investment in crushing facilities and transport infrastructure will be required for expansion potential to be met.

Russian Federation and Ukraine

Since 2000, the Russian Federation and the Ukraine have increased their presence on the world grains markets. The Russian Federation has increased its share of world wheat production from 6 per cent in 2000-01 to 9 per cent in 2008-09. Over the same period, Russian barley production has increased from 11 per cent of world production to 15 per cent. The Ukraine’s wheat production has grown from 2 per cent of world production in 2000-01 to 4 per cent in 2008-09. Barley production in the Ukraine has grown from 5 per cent of world production in 2000-01 to 8 per cent in 2008-09.

As production has increased in these countries, so has the availability of grain for export to world markets (figure b). In 2000-01, the Russian Federation exported 1.1 million tonnes of wheat and in 2008-09 this has increased to 14 million tonnes. The Russian Federation has become an important exporter of wheat to the Middle East and North Africa. Similarly, Ukraine’s exports of wheat, barley and corn have all increased since 2000.

World demand

Over the medium term, world demand for biofuels will continue to be a key driver of demand for grains and oilseeds, particularly in the United States, the European Union and Asia. Ethanol and biodiesel compete directly with petroleum-based petrol and diesel in energy markets. Consequently, oil prices will continue to drive biofuel prices and influence the prices of their agricultural feedstocks.

World wheat consumption is projected to be 672 million tonnes in 2013-14, compared with a record 648 million tonnes in 2008-09. The largest use of wheat is for human consumption, accounting for an average of slightly more than 70 per cent of total use. The volume of wheat used per person appears to be declining. However, total wheat used for human consumption has risen as populations have grown.

Use of coarse grains and oilseeds is projected to grow over the medium term. The demand for coarse grains and oilseeds for biofuels is expected to continue increasing over the projection period. Traditional uses such as in animal feed and for human consumption are also expected to increase. Coarse grains and oilseed consumption is projected to reach 1.1 billion tonnes and 456 million tonnes, respectively, by 2013-14.

Biofuels continue to drive demand

The major biofuels producers are the United States, Brazil and the European Union, with each using a different feedstock in biofuels production. The main feedstocks used in biofuels production are corn in the United States, sugar in Brazil and vegetable oils in the European Union.

The use of coarse grains and vegetable oil in the production of biofuels has increased dramatically since early 2000 (figure c). Coarse grains use increased by nearly 50 per cent between 2000-01 and 2008-09. The use of vegetable oil has nearly tripled over this period.

Assuming economic growth strengthens in the major industrial economies after 2009-10, the price of crude oil is forecast to increase over the medium term. The price of oil (in 2008-09 dollar terms) is projected to increase by 63 per cent to reach US$72 a barrel by 2013-14. Such an outcome, if it eventuates, would lead to higher biofuels prices, improving the profitability of the biofuels industry and supporting higher production.

Government mandates remain

Many governments around the world support the production and use of biofuels as an alternative source of fuel and have mandates supporting the production of these renewable fuels. These policies are a driver of increased grains and oilseed demand over the outlook period.

The European Union has a mandatory biodiesel target of 10 per cent by 2020. The United States has mandated biodiesel use to increase from 500 million gallons (1.9 billion litres) to 1 billion gallons (3.8 billion litres) by 2012. In Indonesia, fuel blending is not mandatory but there is a plan to increase the biodiesel blend from around 5 per cent at present to 10 per cent in 2010. In Thailand, the government has a plan to replace 20 per cent of its vehicle fuel consumption with biofuels and natural gas by 2012. In the Republic of Korea, biodiesel fuel blending is expected to increase from 0.5 per cent to 3 per cent in 2012.

United States an important contributor

In the past two years there has been considerable expansion in the distillery capacity of the US ethanol industry. However, the sharp decline in biofuel prices since mid-2008 is expected to lead to some consolidation of the US ethanol industry in the short term, with less profitable firms closing plants and even exiting the industry. However, over the medium term, several factors are likely to influence the profitability of the biofuels industry. These include: an expected recovery in the price of oil; the price of feedstocks; the continuation of government policies supporting ethanol production and consumption; and the development of technologies to use cellulosic feedstocks.

The US Government mandated a progressive increase in the use of renewable fuels in transport in the Energy Independence and Security Act of 2007. Under the Act, the Renewable Fuel Standard (RFS) was set at 9 billion gallons (34 billion litres) in 2008, and mandated to rise to 36 billion gallons (136 billion litres) by 2022. However, from 2016, all the increase in the RFS mandate must be met from cellulosic ethanol (plant material other than corn starch). This means corn starch is likely to be used as the main feedstock to produce a maximum of 15 billion gallons (57 billion litres) of ethanol by 2015. This would be equivalent to 137 million tonnes of corn and is 70 per cent more than the quantity of corn used to produce ethanol in 2007. If the RFS is binding, these targets will provide substantial support to US domestic demand for corn over the projection period.

The commercial development of second generation feedstocks will be important in meeting the mandated ethanol targets over the longer term. Cellulosic ethanol, a key next generation biofuel, can be made from switch grass, corn stover, forest waste, fast growing trees, wood chips and other plant material. Support provided in the 2008 US Farm Bill is likely to accelerate the development of commercial plants producing cellulosic ethanol in the next few years.

Biodiesel could drive the emergence of other oilseed crops

The rapid expansion in the biodiesel sector has led to an increase in the industrial use of different vegetable oils. The use of palm oil, soybean oil and canola/rapeseed oil have increased by an average of 12 per cent, 54 per cent and 32 per cent a year, respectively, over the past five years.

The expansion of biofuels production has been a contributing factor to the rapid rise in grains and oilseed prices during 2007 and 2008. As a result, concerns have been raised about food crops being diverted into the production of renewable fuels. Research into different feedstocks has provided alternative oilseed crops which may be used. Jatropha is a crop which seems viable for use as an alternative feedstock because it can be grown in soils not suitable for other crops and its production will not take land away from food crops.

Livestock another major consumer

The use of grains and oilseeds for livestock feeding purposes is projected to increase towards the end of the outlook period, as demand for livestock products recovers and animal numbers expand. However, there is likely to be some substitution of distillers grains for cereal grains in livestock feed over the medium term.

When ethanol is produced from corn only the starch is used, and the resulting co-product – distillers grains – has all the remaining nutrients, protein, fat, minerals and vitamins. Distillers grains are marketed in three forms: distillers dried grains (DDG), wet distillers grains (WDG) and dried distillers grains with solubles (DDGS). All three products can be used for livestock feeding. However, the inclusion rates in rations vary between ruminants and monogastrics.

With policies continuing to encourage ethanol production in the United States, there is likely to be increased availability and use of distillers grains over the medium term.

Australian medium-term outlook

Over the five years to 2013-14, the area sown to grains and oilseeds is projected to average 23.1 million hectares, compared with an average 22.1 million hectares in the previous 10 years. Since the 1990s there has been a major shift in Australian broadacre agriculture, with a steady decline in the size of the Australian sheep flock and an increase in the area under cropping (figure d).

The Australian sheep flock is projected to remain at around 75 million sheep over the projection period. This number of sheep remains well below the 110 million sheep in Australia in early 2000.

Total grains and oilseed production is projected to be 42.9 million tonnes by 2013-14.

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 and the announcement of trials in Western Australia from 2009-10. The introduction of GM crops could increase yields for some grains and oilseed crops over time. Most of the attraction of GM crops, particularly canola, over the next few years is likely to be the reduced growing costs stemming from increased flexibility in weed and pest management.

Profile of Australian grains producing farms

In this report, grains farms have been defined as those with at least 100 hectares sown to crops. During the 2000s, just less than 28 500 broadacre farms in Australia sowed at least 100 hectares of crops per year (table 1). However, there is considerable variability in broadacre farms’ cropping intensity, resulting in markedly different financial performance among these businesses.

To investigate the physical characteristics and financial performance of broadacre farms with different levels of cropping intensity, farms surveyed by ABARE have been classified into four groups based on their dependence on cropping receipts:

• low intensity farms which generate less than 20 per cent of receipts from crops
• medium intensity farms which generate 20 to 50 per cent of receipts from crops
• high intensity farms which generate 50 to 80 per cent of receipts from crops
• very high intensity farms which generate more than 80 per cent of receipts from crops.

While an estimated 19 per cent of cropping farms had a low level of cropping intensity, these farms only had a 9 per cent share of total area sown to crops and a 2 per cent share of revenue received from the sale of crops. In contrast, cropping farms with a very high level of cropping intensity accounted for 45 per cent of the value of broadacre crop sales. Close to 60 per cent of farms are either high or very high intensity cropping farms. They account for three-quarters of area sown to crops and 86 per cent of the value of broadacre crop sales.

In 2007-08, 91 per cent of high and very high intensity cropping farms were located in the wheat-sheep zone. A higher proportion of cropping farms in the high rainfall zone were classified as low or medium intensity cropping farms than those in the wheat-sheep zone (map 1). With the climate and agro-economic conditions in the high rainfall zone more favourable for beef and other livestock farming and less favourable for crop production, many cropping farms in this region have a bigger focus on livestock farming than those in the wheat-sheep zone. There were few cropping farms located in Australia’s pastoral zone and the majority of these farms were low intensity cropping farms.

During 2007-08, low intensity cropping farms operated an average area of almost 3800 hectares, compared with 3000 hectares for all cropping farms (table 2). Despite their relatively large size in terms of average area operated, low intensity cropping farms had fewer hectares sown to crops on average. However, they were more diversified in their activities and had more sheep and beef cattle on average than higher intensity cropping farms.

Around 55 per cent of area sown to grains during 2007-08 was cropped to wheat and a further 21 per cent was cropped to barley. In comparison, other grain crops such as oats, sorghum, oilseeds and pulses had a relatively small share of area sown. High intensity cropping farms tended to have a greater number of different crops and a greater focus on higher value food and feed crops. The proportion of area sown to wheat and pulses increased with cropping intensity. In contrast, the proportion of crop area planted to oats decreased as cropping intensity increased.

Compared with the average over the past 10 years, there were fewer hectares sown to crops requiring high rainfall such as oilseeds and pulses during 2007-08. However, on average there were more hectares sown to lower rain requiring crops such as barley and sorghum.

Seasonal conditions

Seasonal conditions for cropping improved in the first half of 2007, around the sowing time for winter crops. However, for many crop producing regions, there was a deterioration in seasonal conditions during the developmental stage for winter crops, in late winter and spring. From late 2007 to early 2008, during the winter crop harvesting period and summer crop sowing period, there was substantial rain in some cropping regions of Queensland, northern New South Wales and Western Australia.

As part of the survey interviews conducted around October 2008, farmers were asked to describe the seasonal conditions which prevailed throughout 2007-08. Responses were compared with a similar question asked in the previous year. Overall, seasonal conditions for grain production were relatively better in 2007-08 than in 2006-07 with a higher proportion of farmers reporting average or above average seasonal conditions for production and a lower proportion reporting drought (map 2). However, cropping farms in parts of New South Wales, South Australia and northern Western Australia reported adverse seasonal conditions in 2008.

Despite the improvement in seasonal conditions, 42 per cent of cropping farms still considered that they were operating under drought conditions (table 3). A higher proportion of low and medium intensity cropping farms reported drought conditions than high and very high intensity cropping farms.

Grains production

In 2006-07, adverse seasonal conditions throughout much of Australia’s grains producing regions resulted in many producers sowing fewer hectares of crops. Hot and dry conditions during the critical crop establishment and development period generally led to poor grain yields and, in some cases, complete crop failure.

Improved seasonal conditions during the first half of 2007 led to an increase in the average area sown to winter crops in 2007-08 (table 4). Plantings of sorghum were particularly high, up by around 130 per cent from the previous year because of a substantial improvement in seasonal conditions in the main sorghum producing regions of Queensland and northern New South Wales. Overall, the area sown to grains rose by 4 per cent on average in 2007-08. As a result of increased plantings and improved seasonal conditions, the average quantity of grains harvested also rose in 2007-08. Higher rainfall in northern cropping areas resulted in record sorghum production in Queensland and New South Wales. While grain yields were higher on average in 2007-08 than 2006-07, they were still below their 10 year average, with a return to hot and dry conditions during late winter and spring adversely affecting crop development.

Overall, average grains production is estimated to have increased in 2008-09 because of increased winter crop plantings. In Queensland, northern New South Wales and the northern grain belts of Western Australia, in-season rainfall and stored soil moisture led to increased winter crop production. However, rain through the harvest period resulted in a downgrading of grain quality, increasing the supply of feed grains and resulting in lower prices for many growers. In contrast, below average winter and spring rainfall in 2008 is expected to result in low yields in southern parts of Australia during 2008-09.

Grain stocks

As of 30 June 2008, grain cropping farms had in total an average of 148 tonnes of grain on hand, of which one-third was sorghum. Cropping farms keep stores of grain on hand for feed, for seed for the following year’s crop, to take advantage of marketing opportunities or because they were unable to sell everything they produced during the year.

Historically, there has been little change in the average quantity of wheat, oats, barley, pulses and oilseeds kept on hand by cropping farms which grew the grain during the past 15 years (figure e). This is probably because producers only keep enough grain on hand as planting seed for the following year’s crop or to feed livestock.

In contrast, cropping farms which grew sorghum exhibited more volatility in the amount of sorghum they kept on hand. At 30 June 2008, cropping farms which grew sorghum had an average of almost 500 tonnes of sorghum on hand per farm, up by almost 350 tonnes from the previous year. With sorghum production at record highs during 2007-08 it is likely that many sorghum producers were unable to sell all their sorghum in such a short period of time. Around 64 per cent of cropping farms which grew sorghum had stocks of sorghum on hand at 30 June 2008. However, high and very high intensity cropping farms were more likely to have stocks of sorghum on hand than lower intensity cropping farms.

box 1

Major financial performance indicators

• Total cash receipts: total revenues received by the business during the financial year.
• Total cash costs: payments made by the business for materials and services and for permanent and casual hired labour (excluding owner manager, partner and family labour).
• Farm cash income: total cash receipts – total cash costs
• Farm business profit: farm cash income + changes in trading stocks – depreciation – imputed labour costs
• Profit at full equity: return produced by all the resources used in the business.
  farm business profit + rent + interest + finance lease payments – depreciation on leased items
• Rate of return: return to all capital used

Farm financial performance

2007-08

In 2007-08, average grain crop receipts rose for broadacre cropping farms by around 52 per cent a farm because of increased production and higher prices received for grains (table 5). Cash receipts for sorghum more than tripled in 2007-08. Seasonal conditions in many grain producing regions led to a reduction in cattle turn-off, as beef cattle herds were being rebuilt. Despite a fall in beef cattle and wool receipts, total cash receipts rose by 8 per cent to average $660 000 per cropping farm in 2007-08.

Farm cash costs fell by 2 per cent on average in 2007-08 driven largely by a 62 per cent fall in fodder costs. Fodder costs fell because of an increase in on-farm feed supplies, a reduction in the price of lower grade livestock feed grains and improved grazing conditions. The reduction in these costs more than offset a rise in fertiliser costs, which rose by 33 per cent on average in 2007-08 mainly because of increased area cropped and higher fertiliser prices.

The combined effect of falling costs and increased receipts was a doubling in average farm cash income to be $121 700 per farm in 2007-08 (figure f). The average rate of return to capital, excluding capital appreciation, for cropping farms rose in line with farm cash income from -0.5 per cent in 2006-07 to 1.8 per cent in 2007-08.

Cropping intensity, 2007-08

Farm financial performance increases with cropping intensity, largely because farm cash receipts increase at a faster rate than cash costs as cropping intensity increases. The main factor driving this is the tendency for area sown, grain yields and grain prices to all increase with cropping intensity (table 4).

In 2007-08, the rise in crop receipts resulting from higher grain production was insufficient to counteract the fall in average receipts from beef cattle for low intensity cropping farms (table 6). Overall, total cash receipts fell for low intensity cropping farms by 13 per cent on average during the year. Despite an 11 per cent fall in cash costs, the average farm cash income for low intensity cropping farms fell by 46 per cent to $17 270 in 2007-08.

In contrast, incomes for high or very high cropping intensity farms had a greater reliance on cropping receipts and experienced a substantial rise in both total cash receipts and farm cash income on average in 2007-08. Farm cash income for very high intensity cropping farms almost tripled in 2007-08 to average $295 810 per farm. Very high intensity cropping farms also had a high rate of return to capital, excluding capital appreciation in 2007-08 at 5.5 per cent on average.

2008-09

The farm financial performance of grains farms is projected to further improve in 2008-09 as a result of increased grain production. Receipts from the sale of crops are projected to rise by 22 per cent on average, despite a fall in grain prices resulting from expected higher grains production. While average receipts from sheep, lambs and wool are projected to fall in 2008-09 because of a reduction in turn-off rates, total cash receipts are projected to rise by 5 per cent overall to $691 300 (table 5).

Total cash costs for grains farms are projected to rise in 2008-09 as a result of increased production leading to a rise in the costs associated with fertiliser, and crop and pasture chemicals. However, falling interest rates and reduced fodder costs are projected to offset most of the cost rises, with average total cash costs growing by only 1 per cent in 2008-09.

With the projected increase in cash receipts more than offsetting the increase in cash costs, farm cash incomes are projected to rise in 2008-09 by 20 per cent to average $145 900 a farm. This, combined with an increase in the value of farm trading stocks, is projected to result in an increase in farm business profit to $21 300 a farm in 2008-09. Additionally, the proportion of grains farms with a negative farm cash income is projected to fall from 31 per cent in 2007-08 to 29 per cent in 2008-09.

Historically, incomes for grains farms have generally been higher on average than for other industries (figure g). During 2008-09, projected incomes for grains producers continue to be higher than the average for other broadacre industries. While incomes are projected to rise for the grains, beef and sheep industries, dairy incomes are projected to fall on average during 2008-09 as a result of lower prices received for dairy products.

Cropping intensity, 2008-09

After a large increase in farm cash income for very high intensity cropping farms in 2007-08, this is the only group of farms projected to have a fall in average farm cash income in 2008-09. Farm cash income is projected to fall for very high intensity cropping farms by 42 per cent during the year to average $172 200 a farm because of lower grains production (table 6).

Financial performance by hectare operated

Expressing farm cash income on a ‘per hectare operated’ basis enables a more direct comparison of the financial performance of farms of differing scales of operation.

Farm cash income per hectare operated increases dramatically with cropping intensity, as farm cash receipts per hectare increase faster than cash costs per hectare (figure h). This may be a reflection of low intensity farms having a lesser reliance on the cropping part of their enterprise, remembering that on average, cropping industry farms generally out perform farms in other broadacre industries. However, it also reflects the smaller scale of low intensity cropping farms with lower average total cash receipts and total cash costs. As with many other agricultural industries, economies of scale dictate that farm financial performance rises on average with the size of the enterprise.

Farm cash incomes per hectare are projected to improve for a second consecutive year in 2008-09, after reaching record lows in 2006-07 at just $18 a hectare on average. Farm cash incomes rose to $41 a hectare in 2007-08 and are projected to rise to $48 a hectare in 2008-09.

While incomes per hectare for low cropping intensity farms fell in 2007-08, they are projected to rise in 2008-09. In contrast, very high cropping intensity farms experienced a large increase in average cash income per hectare in 2007-08, which is not projected to be sustained into 2008-09.

Investment and future expansion

Capital investments

Capital investments, including the expansion of the operating area of farm land, are an important means of boosting farm productivity and incomes. Productivity growth enables grain producers to increase the viability of their farm business in the longer term.

The average capital value of grain producers has been growing over time, largely driven by a growth in land values (figure i). Before 2002-03 a large proportion of grains producers acquired new land to expand the scale of their farm operations. However, because of the effects of drought and increasing land values, the proportion of producers expanding their land area has dropped off in recent years with many producers opting to invest in capital other than land. In 2007-08, grain farms had an average capital value of slightly less than $5.5 million.

Since 1999-2000, land values per hectare have almost doubled (figure j). However, over the past two years, grains farms in the high rainfall zone have been experiencing a fall in the average value of land per hectare. With land value making up the majority of farm capital, weaker land values adversely affect producers’ equity levels.

In recent years, purchases of new capital have shown considerable volatility, 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 per farm expenditure on land acquisitions has increased because of higher land prices in the main cropping regions.

In 2007-08, grains farms spent on average $155 000 a farm on capital purchases (figure k). Plant and machinery purchases as a proportion of capital purchases increased in 2007-08 with fewer grains producers purchasing land.

Farm debt and equity

The ability of producers to fund future expansion of grains and livestock production depends on their ability to access funds. While liquid assets or farm cash flows can be used to fund this expansion, the use of debt is an important source of funds. If farm debt is high relative to equity, it may be more difficult for the farm to acquire additional debt.

Average debt for cropping farms has increased by 168 per cent in real terms over the past 10 years reflecting high levels of capital investment (figure l). An increase in land purchases debt was incurred because of land purchases and higher prices for land. Additionally, poor seasonal conditions adversely affected farm cash incomes and many producers borrowed funds to finance the daily operations of their farm business, leading to an increase in their working capital debt.

In 2007-08, the average cropping farm had $879 000 in debt. While high and very high intensity farms were able to use strong cash flows in 2007-08 to reduce their debt, low and medium intensity cropping farms experienced a rise in their average debt.

To determine the extent to which farm debt affects the cash flow of producers, a debt servicing ratio is used. The debt servicing ratio is the ratio of interest payments to total cash receipts and is a measure of the ability of producers to service debts from their revenue stream.

Reflecting rising debt, grains producers experienced a rise in their debt servicing commitment during 2007-08 (figure m). The average farm used 11 per cent of farm receipts to pay interest on their debt.

High and very high intensity cropping farms were able to reduce their debt servicing commitment in 2007-08, reflecting their reduced debt during the year.

As a result of debt growing faster than farm equity, the average equity ratio of grains farms has been falling in recent years to average just less than 84 per cent in 2007-08 (figure n). In 2007-08, the reduction in average equity ratios was driven by low and medium intensity cropping farms who had higher average debt and lower average land values for farms in the high rainfall zone. However, higher projected cash flows during 2008-09 and lower interest rates should help cropping farms to maintain their equity position.

Capacity for future expansion

Grains industry farms have a relatively strong equity position and should have little trouble continuing to expand in the future should seasonal conditions allow them to. Investments in land and capital over the past 10 years should enable many producers to expand production and boost productivity.

High cash flows in 2007-08 enabled high and very high cropping intensity farms to reduce debt and expand crop planting and livestock numbers. While cash flows are projected to be lower in 2008-09 for very high cropping intensity farms, average farm cash income still remains high relative to low incomes experienced in 2006-07, which will help them maintain a high level of grain crop planting and production.

While low intensity cropping farms had a higher proportion of producers with negative farm cash income and low equity in 2007-08 (table 7), the substantial rise in average farm cash incomes projected for low and medium intensity farms during 2008-09 will enable many of these producers to reduce debt and/or expand crop plantings and livestock numbers in 2009-10. Farms which continue to have negative farm cash incomes may find it difficult to access the funds required to expand production in the future.

For cropping farms overall, a steady rise in land values has enabled farms to maintain their equity position despite high growth in debt. Provided that land values remain high, cropping farms have some capacity to take on additional debt and fund future expansion.

Productivity growth

Total factor productivity (TFP) is a main indicator used to monitor and analyse the performance of various sectors of the economy. It measures outputs relative to total inputs used to produce the output. Technological advances, improvements in management and efficient exploitation of economies of scale, all influence the rate of growth in productivity.

Total factor productivity growth in Australia’s broadacre and dairy industries is highly variable on a year-to-year basis. Between 1977-78 and 2006-07 broadacre producers’ productivity growth averaged 1.5 per cent per year, with cropping farms recording the highest annual growth in productivity (table 8).

Productivity growth can be driven by producers generating the same amount of output with fewer inputs, increasing output with the same number of inputs or increasing output at a faster rate than inputs. Over the past three decades, cropping farms in Australia realised an annual productivity growth rate of 2.1 per
cent. This was the result of producers increasing output by 3.1 per cent but increasing inputs by only 1.0 per cent. In contrast, mixed livestock-cropping farms realised productivity growth of 1.5 per cent a year by boosting production by 0.1 per cent while using 1.5 per cent fewer inputs.

While productivity growth remains relatively high in the cropping industry, there is evidence that productivity improvements have slowed in recent years. Over the period 1977-78 to 2001-02, the annual productivity growth rate was 3.2 per cent for the specialist cropping industry, compared with 2.1 per cent over the period 1977-78 to 2006-07.

While productivity growth within the Australian cropping industry is fairly similar between regions, the factors driving it differ markedly (table 9). Producers in the western and southern agro-ecological regions defined by the Grains Research and Development Corporation (GRDC) realised strong growth in farm outputs and some input growth. In the northern agro-ecological region, productivity growth was a result of more modest growth in output accompanied by a reduction in overall input use.

Methodology

ABARE surveys are designed and samples selected on the basis of a framework drawn from the Business Register maintained by the Australian Bureau of Statistics (ABS). This framework includes agricultural establishments in each statistical local area classified by size and major industry.

Data provided in this paper have been collected via on-farm interviews and incorporate detailed farm financial accounting information.

The estimates presented have been calculated by appropriately weighting the data collected from each sample farm. Sample weights are calculated so that sample estimates of numbers of farms, areas of crops and numbers of livestock in various geographic regions and industries correspond as closely as possible to the most recently available ABS data, as collected in its Agricultural Censuses and updated annually with data collected in Agricultural Commodity Surveys.

The 2008-09 projections are based on data collected via on-farm and telephone interviews in the period 1 October to 9 December 2008. The estimates include crop and livestock production, receipts and expenditure. Modifications have been made to expected receipts and expenditure for the remainder of 2008-09 where significant price changes have occurred post interview.

Reliability of estimates

The reliability of the estimates of population characteristics presented in this report depends on the design of the sample and the accuracy of the measurement of characteristics for the individual sample businesses.

Sampling errors

Only a proportion of businesses in a state are surveyed. The data collected from each sample business are weighted to calculate population estimates. Estimates derived from these businesses are likely to be different from those that would have been obtained if information had been collected from a census of all businesses. Any such differences are called ‘sampling errors’.

The size of the sampling error is most influenced by the survey design and the estimation procedures, as well as the sample size and the variability of businesses in the population. The larger the sample size, the lower the sampling error is likely to be. Therefore, state estimates are likely to have greater sampling errors than national estimates.

To give a guide to the reliability of the survey estimates, sampling errors have been calculated for the estimates. These estimated errors, expressed as percentages of the survey estimates and termed ‘relative standard errors’ are given next to each estimate in parentheses.

Comparing estimates

When comparing estimates between different states and size groups, it is important to recognise that the differences are subject to sampling error. As a rough rule of thumb, a conservative estimate (an overestimate) of the standard error of the difference can be constructed by adding the squares of the estimated standard errors of the component estimates and then taking the square root of the result. An example is given below.

Suppose the estimates of total cash receipts were $100 000 in Victoria and $125 000 in Tasmania - a difference of $25 000 - and the relative standard error is given as 6 per cent for each estimate. The standard error of the difference can be estimated as:

so the relative standard error of the difference is:

Data quality

ABARE’s survey system is designed to produce data of a quality suitable for research and analysis at the unit level. This involves a set of quality controls, with procedures being tailored to the specific requirements of individual surveys. The key to the success of the system is employing specialist highly experienced survey officers and statisticians to guide the design and operation of the data collection and estimation process.

With voluntary surveys, the first critical control point is maximising the response rate of the selected survey sample. Having staff with appropriate interpersonal skills is essential. Nevertheless, low response rates can be unavoidable in some surveys. Problems of data quality arising from this source are reduced by the use of procedures to guide the selection of replacement businesses, and the use of statistical modelling in the estimation process.

Data quality is also enhanced by checks against available external data sources and by internal consistency checks. The first of these checks takes place at the time of collection. With expert survey staff and training in the specific survey topic, much of the checking for internal consistency of data is done as part of the interview. After the collection of the survey information, further automated and manual checks against the full set of collected data are made. Extreme observations are also identified and, if necessary, checked by a second contact with the survey respondent.