Improved seasonal conditions in parts of Australia in 2004-05 and during the spring of 2005-06 underpinned an increase in farm incomes. However, the return of severe drought across most of southern Australia in 2006 has led to a significant reduction in farm production and incomes in 2006-07. In January 2007, around 60 per cent of Australian broadacre farmers reported the existence of drought conditions (map 1). This is similar to the proportion of producers who reported drought in October 2002.

Over the five years to 2005-06, when seasonal conditions were mixed but generally below average, prices for livestock and grains remained relatively high, assisting farmers to manage cash flow when production had fallen. In particular, high beef cattle prices were crucial in supporting farm incomes, as more Australian farms carry beef cattle than engage in any other farming enterprise.

Notwithstanding the mix of seasonal conditions in the five years to 2005-06, demand for rural land was strong which resulted in rising farm capital values. This served to offset the impact of recent increases in farm debt on farm equity levels. At the end of June 2006, the average equity ratio for Australian broadacre farms was 90 per cent, which is relatively high in historical terms. However, with farm debt projected to increase in 2006-07 and diminished prospects for further increases in land values, farmers will be more reliant on farm income and debt management to maintain farm equity in the medium term.

financial performance of Australian farms

Each year ABARE interviews a large number of producers from the broadacre and dairy sectors of Australian agriculture as part of its annual broadacre and dairy surveys. The information collected provides a basis for analysing the current financial position of farmers in these industries and expected changes in the short term. Information for the preceding financial year is collected between July and October, usually by face to face interview. Estimates are also collected by telephone for the current financial year, usually in October and November. However, in October and November 2006 there was more than usual uncertainty about production outcomes over the remainder of the financial year. Many producers were waiting to see how seasonal conditions unfolded over summer before making critical summer crop and livestock selling decisions. Consequently, ABARE recontacted farmers in January 2007 to update production and financial estimates for the current financial year.

farm receipts
Overall, average total cash receipts for broadacre farms are projected to fall by nearly 20 per cent in 2006-07, with the bulk of this reduction being driven by reduced crop receipts (table 1). There were severe rainfall deficiencies over most winter cropping regions of Australia during 2006, particularly in late winter and spring. The effect of low rainfall over this period was also exacerbated by record high temperatures. Reflecting the extreme conditions, winter grains production in 2006-07 was around 60 per cent lower than the previous year, making it the lowest winter crop production in over ten years. Winter crop production is reported to have been sharply reduced in all areas except Western Australia, northern New South Wales and central Queensland where seasonal conditions were relatively more favourable. In addition, prospects for 2006-07 summer crops remain below average, despite some rains in early 2007.

Extremely dry conditions in northern New South Wales and southern Queensland during the early planting period in late 2006 are expected to limit potential summer crop production.

The reduction in crop production will be partially offset by higher crop prices. Prices received by farmers for all major grains and oilseeds are forecast to be 20–30 per cent higher in 2006-07 compared with 2005-06 because of reduced world grain production and stocks, coupled with increased domestic feedgrain demand for livestock feeding. Crop receipts will also be supported by payments from the large 2005-06 crop that will be received in the 2006-07 financial year. Despite these factors, average crop receipts are projected to fall by nearly 40 per cent for broadacre farms in 2006-07.

Farm receipts from sheep and lamb sales are also projected to fall in 2006-07. Lower saleyard prices for sheep and lambs, reflecting an increase in the number of stock sold and the sale of unfinished stock are projected to more than offset the effect on revenue of an increase in the number of sheep sold, particularly in South Australia and Victoria. The latest survey data indicate that wool production per farm will fall by around 9 per cent in 2006-07, primarily through a reduction in the number of sheep shorn. However, the impact of reduced wool production on farm receipts is projected to be partially offset by the recent recovery in the wool market and sale of some wool from on-farm stocks.

With low pasture availability and high feed prices, producers in southern Australia intend to increase the number of beef cattle sold and reduce herd numbers. Higher yardings, together with the sale of less finished stock, are forecast to result in average prices received for beef cattle being lower than in the previous year despite continued strength in the Australian beef market. Receipts from beef cattle sales are projected to fall for producers in southern Australia, with lower saleyard prices more than offsetting the increase in the number of beef cattle sold. In contrast, beef producers in northern Australia are enjoying average or above average seasonal conditions. These producers are attempting to increase herd numbers, which serves to subdue beef receipts in the short term, although incomes are likely to improve in the medium term once turnoff increases.

1 financial performance – all broadacre industries average per farm
		2004-05	2005-06 p		2006-07 s
total cash receipts	$	381 695	359 000	-6	288 900
total cash costs	$	308 911	277 710	-5	262 300
farm cash income	$	72 785	81 290	-11	26 600
farms with negative farm cash income	%	28	23	-8	44
farm business profit	$	3 693	8 620	-96	–59 800
farms with negative farm business profit	%	61	58	-3	77
profit at full equity
– excl. capital appreciation	$	32 351	41 540	-21	–22 200
– incl. capital appreciation	$	225 373	233 070	-15	na
farm capital at 30 June a	$	3 131 247	3 426 030	-4	na
net capital additions	$	47 191	28 400	-78	na
farm debt at 30 June b	$	322 640	357 380	-6	412 700
equity at 30 June b c	$	2 691 881	3 054 370	-5	na
equity ratio b d	%	89	90	-1	na
harvest loans at 30 June e	$	10 740	11 730	-13	na
farm liquid assets at 30 June b	$	121 965	134 840	-15	na
farm management deposits (FMDs) at 30 June b	$	26 990	21 180	-9	na
share of farms with FMDs at 30 June b	%	24	19	-7	na
rate of return f
– excl. capital appreciation	%	1.1	1.3	-19	–0.6
– incl. capital appreciation	%	7.8	7.3	-13	na
off–farm income of owner manager and spouse b	$	27 588	31 200	-6	na
a Excludes leased plant and equipment. b Average per responding farm. c Farm capital minus farm debt. d Equity expressed as a percentage of farm capital. e Harvest loans are not included in farm debt. f Rate of return to farm capital at 1 July. p Preliminary estimates. s Provisional estimates. na Not available.

Milk production will be reduced in 2006-07 as a consequence of drought across most dairying regions. Drought and lower availability of irrigation water have resulted in reduced pasture growth and have driven fodder costs higher. This has led many dairy farms to dry off cows early and reduce herd numbers in anticipation of continued drought conditions. As a consequence, average milk production per farm is forecast to fall by around 10 per cent in 2006-07. Early in 2006-07, world prices for dairy products were lower than the previous year although they have recently exhibited some signs of recovery. Average Australian farmgate milk prices are forecast to fall slightly in 2006-07 although this is not uniform across all states. Overall, milk receipts are forecast to fall sharply in 2006-07, mainly as a result of the drop in production.

farm costs
Average cash costs for broadacre farms fell by around 8 per cent in 2005-06 (table 1), largely owing to a significant reduction in livestock purchases that more than offset the higher costs associated with the production, harvest and sale of the large winter crop, and higher interest payments. The latter was mainly the result of an increase in average farm debt as expenditure on capital items continued at historically high levels. In contrast, cash costs for dairy farmers rose by around 20 per cent, mainly from higher labour costs, fodder cost and interest payments.

In 2006-07, total farm cash costs for broadacre farms are projected to fall by a further 5 per cent as farmers trim costs in the face of reduced income. Significant reductions are expected in the cost of livestock purchases, repairs and maintenance and crop harvesting and marketing costs. However, these reductions are largely offset by higher fodder costs and increased interest payments associated with the expected increase in average farm debt. Another factor that will constrain the extent to which broadacre farmers can reduce costs in 2006-07 is the expected cost of planting the 2007 winter crops. Broadacre producers currently indicate that given a return to more normal seasonal conditions in autumn 2007 they intend to plant an expanded area to winter crops this year and most of the planting costs for this crop will be incurred in this financial year.

The expected increase in cash costs on Australian dairy farms in 2006-07 is almost entirely the result of higher fodder costs. Very dry seasonal conditions have significantly reduced pasture availability in most dairying regions and in order to secure fodder supplies producers have had to pay significantly higher prices than in previous years. Fodder costs aside, other cash costs for dairy farms are projected to fall slightly as producers attempt to mitigate the effect of lower receipts and high fodder costs on their financial performance.

major financial performance indicators farm cash income = total cash receipts – total cash costs   Total revenues received by the farm business during the financial year Payments made by the farm business for materials and services and for permanent and casual hired labour (excluding owner manager, partner and family labour) farm business profit = farm cash income + changes in trading stock – depreciation – imputed labour costs profit at full equity = farm business profit + rent + interest and finance lease payments – depreciation on leased items (Return produced by all the resources used in the farm business) rate of return = profit at full equity total opening capital x 100 (Return to all capital used) off-farm income = wages off-farm + other business income + investment + social welfare payments (Owner manager and spouse only)

farm cash income and farm business profit
In 2003-04 and 2004-05, farm cash income for the broadacre industries as a group improved steadily as production on these farms recovered from the 2002-03 drought. High livestock and crop prices over this period also helped the recovery. In 2005-06, crop production improved significantly and expenditure on livestock purchases and feed fell, resulting in a further modest increase in farm cash income (figure A).
In historical terms farm financial performance in 2006-07 is projected to be one of the poorest on record. A very large reduction in total cash receipts per farm, coupled with a relatively small reduction in total cash costs, is projected to result in a fall in farm cash income for broadacre industries of nearly two-thirds. Farm cash income for broadacre farms is projected to fall from an average of around $81 000 per farm in 2005-06 to less than
$27 000 in 2006-07 — the largest year on year fall in farm cash income recorded in the 29 years during which the current series of ABARE surveys have been conducted (figure A).

Farm cash income is a measure of the cash funds available for farm investment and consumption after paying all costs incurred in production, including interest payments, but excluding capital payments and payments to family workers. It is a short term measure of farm performance because it takes no account of depreciation or changes in farm inventories. A longer term measure of profitability that takes account of capital depreciation and changes in inventories of livestock, fodder, grain and wool is farm business profit.

Average business profit for farms in the broadacre industries is expected to fall in 2006-07 by an even larger amount than the reduction in farm cash income (table 1, figure A). This reflects a projected rundown in inventories of livestock and grains on many farms, particularly those in cropping regions of southern Australia. Reduced livestock numbers will subdue farms’ ability to generate cash flow beyond 2006-07.

However, an exception to this pattern is in the northern regions of Australia where many properties are taking advantage of improved seasonal conditions by beginning to rebuild cattle numbers. In Queensland, for example, the reduction in average income for broadacre farms reflects a mixture of factors, such as reduced crop receipts, fewer livestock sales as producers begin to build up cattle herd numbers, and lower beef cattle prices. However, farm business profit is not expected to fall by as much as farm cash income due to a build up in livestock inventories.

rates of return
Rates of return to total farm capital including capital appreciation have been relatively high in 2003-04, 2004-05 and 2005-06 (table 1). Strong demand for rural land in the past three years has resulted in sharply increased land values in many farming regions, raising the total capital value of farms. Rising farm capital values in recent years have resulted in historically high rates of return including capital appreciation, but have reduced rates of return excluding capital appreciation. Rates of return excluding capital appreciation have also been subdued in many areas by poor farm business profits resulting from below average seasonal conditions. With very low farm business profit projected for 2006-07, rates of return excluding capital appreciation are expected to also be among the lowest on record.

box 1 estimated value of agricultural operations ABARE’s annual broadacre and dairy industry surveys only include farms above a minimum size threshold to exclude noncommercial businesses. This size threshold is based on the estimated value of agricultural operations (EVAO) as calculated by the Australian Bureau of Statistics. ABARE has periodically changed the EVAO cutoff over the life of the two surveys. For the 2005-06 collection, ABARE raised the EVAO cutoff from $22 500 to $40 000. Estimates for 2004-05 have also been made using the same cutoff in real terms. Prior to this change, the last time the EVAO cutoff was changed was for the collection of data for 1991-92 when it was lifted from $20 000 to $22 500. It was kept at that level in nominal terms until the most recent collection. broadacre industries wheat and other crops industry The wheat and other crops industry represents the more specialised producers of cereal grains, coarse grains, pulses and oilseeds. mixed livestock–crops industry The mixed livestock–crops industry covers farms engaged in the production of sheep and/or beef cattle in conjunction with substantial activity in broadacre crops such as wheat, coarse grains, oilseeds and pulses. sheep industry The sheep industry represents the more specialised producers of sheep and wool. However, the number of properties classified to the industry, along with the industry’s contribution to wool production, has declined substantially since the early 1990s as producers diversified enterprises. Currently, sheep industry farms account for only around a third of Australia’s wool production. The majority of both wool and sheep meat production occurs on mixed enterprise farms, particularly on mixed livestock–crops industry farms. sheep–beef industry The sheep–beef industry covers properties engaged in running sheep and beef cattle. As for the sheep and beef industries, this industry also contains a large number of small farms. beef industry The beef industry covers properties engaged mainly in running beef cattle and accounts for around 60 per cent of Australia’s beef production. The beef industry contains a large number of small farms.

performance, by state
The producer rating of seasonal conditions in January 2007 (map 1) is mirrored in the projected financial performance of broadacre farms across Australian states (table 2). Average farm cash income is projected to be very close to zero in New South Wales and Victoria in 2006-07, and positive but much lower than in the previous year in Queensland, Tasmania and South Australia. These poor results reflect the combined impact of widespread crop failures that have drastically reduced total crop receipts and lower prices for beef cattle and sheep.

2 financial performance, by state – all broadacre industries
average per farm
		New South Wales					Victoria
		2004-05	2005-06 p		2006-07 s		2004-05	2005-06 p		2006-07 s
total cash receipts	$	303 190	323 804	-11	227 010		436 320	265 930	-10	187 145
total cash costs	$	230 790	247 805	-9	222 556		374 471	203 394	-11	187 124
farm cash income	$	72 400	75 999	-23	4 454		61 849	62 536	-12	21
farms with negative farm cash income	%	30	22	-15	55		26	18	-20	45
farm business profit	$	3 114	11 176	-119	–85 648		3 369	4 277	-143	–73 287
farms with negative farm business profit	%	65	62	-5	83		56	53	-9	84
profit at full equity
– excl. capital appreciation	$	28 645	37 616	-38	–56 848		24 157	29 586	-21	–42 265
– incl. capital appreciation	$	170 210	147 812	-38	na		225 026	115 002	-20	na
farm capital at 30 June a	$	2 809 653	2 922 354	-10	na		2 601 239	2 765 766	-5	na
net capital additions	$	39 366	26 970	-180	na		39 048	24 062	-103	na
farm debt at 30 June b	$	279 799	289 887	-9	328 468		198 296	226 496	-9	293 006
equity at 30 June b c	$	2 438 418	2 620 848	-11	na		2 374 246	2 526 443	-6	na
equity ratio b d	%	89.7	90	-1	na		92.3	91.8	-1	na
harvest loans at 30 June e	$	3 312	3 135	-29	na		2 557	4 479	-36	na
farm liquid assets at 30 June b	$	110 597	163 422	-34	na		118 471	74 285	-14	na
farm management deposits (FMDs)
at 30 June b	$	16 441	15 490	-19	na		23 731	20 320	-21	na
share of farms with FMDs at 30 June b	%	19	17	-16	na		25	22	-16	na
rate of return f
– excl. capital appreciation	%	1.1	1.4	-31	–1.9		1	1.1	-21	–1.5
– incl. capital appreciation	%	6.5	5.3	-29	na		9.5	4.3	-20	na
off-farm income of owner manager
and spouse b	$	28 425	33 465	-19	na		28 233	30 719	-21	na
		Queensland					Western Australia
		2004-05	2005-06 p		2006-07 s		2004-05	2005-06 p		2006-07 s
total cash receipts	$	355 521	400 941	27	324 254		541 212	526 863	-6	566 009
total cash costs	$	301 121	299 414	22	303 153		430 061	434 452	-7	442 549
farm cash income	$	54 400	101 527	47	21 101		111 151	92 411	-16	123 460
farms with negative farm cash income	%	32	27	12	42		25	28	-21	28
farm business profit	$	–2 925	1 312	3640	–50 279		26 285	3 099	-520	–298
farms with negative farm business profit	%	66	63	7	71		51	55	-12	60
profit at full equity
– excl. capital appreciation	$	31 587	43 182	-119	1 161		74 475	57 978	-26	59 701
– incl. capital appreciation	$	293 688	393 249	-41	na		351 820	550 989	-27	na
farm capital at 30 June a	$	3 867 884	4 363 102	-16	na		3 819 184	4 615 653	-8	na
net capital additions	$	94 811	5 747	-1064	na		27 244	32 791	-109	na
farm debt at 30 June b	$	440 595	500 486	-17	606 978		516 144	616 797	-12	682 339
equity at 30 June b c	$	3 214 019	3 844 665	-17	na		3 132 769	3 972 338	-8	na
equity ratio b d	%	87.9	88.5	-2	na		85.9	86.6	-2	na
harvest loans at 30 June e	$	1 901	1 085	-67	na		61 034	64 769	-15	na
farm liquid assets at 30 June b	$	102 303	93 573	-18	na		183 076	215 471	-16	na
farm management deposits (FMDs)
at 30 June b	$	32 953	21 615	-17	na		37 368	27 584	-22	na
share of farms with FMDs at 30 June b	%	23	18	-15	na		31	19	-20	na
rate of return f
– excl. capital appreciation	%	0.9	1.1	-105	0		2.1	1.4	-26	1.3
– incl. capital appreciation	%	8.3	9.8	-28	na		10	13.5	-26	na
off-farm income of owner manager
and spouse b	$	31 503	28 601	-19	na		29 026	29 830	-21	na

		South Australia					Tasmania
		2004-05	2005-06 p		2006-07 s		2004-05	2005-06 p		2006-07 s
total cash receipts	$	352 151	372 365	-10	295 013		326 999	282 864	-14	190 793
total cash costs	$	270 983	292 084	-11	252 869		238 292	209 849	-11	164 628
farm cash income	$	81 169	80 281	-13	42 145		88 707	73 015	-25	26 166
farms with negative farm cash income	%	24	21	-22	36		11	23	-29	40
farm business profit	$	–15 102	13 584	-77	–50 851		14 878	24 653	-22	–44 234
farms with negative farm business profit	%	62	53	-10	74		51	48	-24	82
profit at full equity
– excl. capital appreciation	$	8 334	42 713	-23	– 19 069		33 722	48 742	-19	–24 264
– incl. capital appreciation	$	122 174	103 019	-27	na		357 521	157 393	-27	na
farm capital at 1 July a	$	3 024 063	3 217 247	-6	na		3 024 380	3 237 904	-12	na
net capital additions	$	39 036	77 873	-85	na		10 342	–27 396	-96	na
farm debt at 30 June b	$	291 926	309 364	-11	328 354		216 771	276 334	-27	332 046
equity at 30 June b c	$	2 647 239	2 900 361	-6	na		2 629 361	2 958 026	-13	na
equity ratio b d	%	90.1	90.4	-1	na		92.4	91.5	-1	na
harvest loans at 30 June e	$	7 802	10 883	-25	na		0	0	0	na
farm liquid assets at 30 June b	$	119 842	142 318	-11	na		201 771	133 430	-38	na
farm management deposits (FMDs)
at 30 June b	$	42 841	30 697	-18	na		28 219	21 267	-56	na
share of farms with FMDs at 30 June b	%	35	24	-17	na		24	18	-43	na
rate of return f
– excl. capital appreciation	%	0.3	1.4	-21	–0.6		1.2	1.6	-15	–0.8
– incl. capital appreciation	%	4.2	3.4	-26	na		13.2	5	-25	na
off-farm income of owner manager
and spouse b	$	17 800	30 951	-19	na		34 338	32 648	-21	na
		Northern Territory					Australia
		2004-05	2005-06 p		2006-07 s		2004-05	2005-06 p		2006-07 s
total cash receipts	$	1 427 516	1 479 737	-10	1 234 701		381 873	358 998	-10	288 905
total cash costs	$	1 541 574	1 004 533	-11	1 179 154		309 256	277 712	-11	262 271
farm cash income	$	–114 058	475 204	-13	55 547		72 616	81 286	-13	26 634
farms with negative farm cash income	%	42	36	-22	46		28	23	-22	44
farm business profit	$	165 470	405 446	-77	271 894		3 487	8 621	-77	–59 787
farms with negative farm business profit	%	44	45	-10	34		61	58	-10	77
profit at full equity
– excl. capital appreciation	$	213 384	473 065	-23	344 384		32 119	41 538	-23	–22 228
– incl. capital appreciation	$	769 578	1 338 705	-27	na		226 603	233 068	-27	na
farm capital at 30 June a	$	11 072 026	12 160 092	-6	na		3 134 689	3 426 025	-6	na
net capital additions	$	33 391	– 29 502	-85	na		47 001	28 396	-85	na
farm debt at 30 June b	$	560 037	560 883	-11	732 801		321 997	357 382	-11	412 685
equity at 30 June b c	$	7 477 625	11 572 709	-6	na		2 696 590	3 054 371	-6	na
equity ratio b d	%	93	95	-1	na		89	90	-1	na
harvest loans at 30 June e	$	0	0	-25	na		10 706	11 728	-25	na
farm liquid assets at 30 June b	$	185 635	145 991	-11	na		122 194	134 837	-11	na
farm management deposits (FMDs)
at 30 June b	$	18 039	28 082	-18	na		26 901	21 178	-18	na
share of farms with FMDs at 30 June b	%	15	13	-17	na		24	19	-17	na
rate of return f
– excl. capital appreciation	%	2.1	4.2	-21	2.9		1.1	1.3	-21	–0.6
– incl. capital appreciation	%	7.6	11.9	-26	na		7.8	7.3	-26	na
off-farm income of owner manager
and spouse b	$	14 924	27 059	-19	na		14 924	31 199	-21	na
a Excludes leased plant and equipment. b Average per responding farm. c Farm capital minus farm debt. d Equity expressed as a percentage of farm capital. e Harvest loans are not included in farm debt. f Rate of return to farm capital at 1 July. p Preliminary estimates. s Provisional estimates. na Not available.

continue to page 2...