Baldeep Gill
Invest or sell the farm?
The spellchecking algorithm in the media department of the Australian Bureau of Agricultural and Resource Economics (ABARE) must have had to trawl through the further reaches of its memory as came across words such as ‘soar', 'resurgence', 'strengthen' and 'boost’. ABARE's recent positive outlook for the major industries of wool, beef, dairy and grain should provide much needed confidence to players in the sector. The basic premise is a return to better production conditions, coupled with strong prices that will lead to higher incomes.
How should the various players respond?
Farmers are faced with the difficult choice of whether or not to invest heavily in the expectation of future rains and continuation of high prices. We all remember the good start in 2007 which was meant to be the break of the drought, but which led into a poor finish and financial disappointment. Could this happen again this year?
From a price perspective, the signs are good that we will see continuing strong prices for all commodities. Like any good business, you wouldn’t budget on price spikes, but world foodstock and feedstock consumption has reached a new level due to population growth, emerging affluence, demand for meat products and the impact of biofuel. As a result, prices are expected to remain high for the immediate future.
What about the weather? Will we get the right amount of rain at the right time? A few days ago, the Bureau of Meteorology said "the big dry has become worse in central Australia and is stubbornly persisting across much of the country". They are much better qualified to comment on this than most of us. It is worth noting that in a 2006 ABARE survey of broadacre farms, 29 per cent did not have a risk management strategy to deal with drought. This should not be allowed to happen in 2008.
Productivity enablers such as Bayer, Syngenta, Incitec, Landmark, Elders and CRT all have the capacity to respond to farmer demand – perhaps even overcapacity. The key challenge will be to proactively go after the right businesses. We should not be surprised to find a bit of hesitation on the part of farmers that are stretched financially as well as in terms of confidence. Productivity enablers have unique data on how their products will help capture the potential upside for farmers. Rather than turning to price discounting to shift product, this kind of data can be of immense value to farmers that can see the pot of gold, but may not be sure how to capture it.
Banks have a strong role to play this year as most farmers will require additional borrowing to invest in their business to capture the upside indicated by ABARE. With farm debt at record levels and current cashflow at a trickle, how do you convince the credit department that additional limits are sustainable? Australian agri banks frequently tout the message that they are cashflow lenders, rather than equity lenders – this will be a year to prove it.
Grain acquisition companies are facing all of this upside as well as the joker in the pack of the changes to the single desk system. For AWB, it is about demonstrating relevance with a proposition that still offers value. For ABB, GrainCorp, CBH and the other boutique players, be careful what you wish for. Growers are seeing record prices and will scrutinize performance more closely than in the past. This is the first year in which they can sell grain to several players and truly compare what goes into their bank account from the different business models.
Some farmers should look at this optimism and decide it is a good time to get out. No matter what happens this year, we are going to get another drought in the future and incomes will, again, plummet. For a number of farmers, particularly smaller operators or those with no succession prospects, this is a great time to sell. Property prices remain strong, commodity prices are high and production conditions look good right now. There are cashed up buyers out there who are ready to consolidate a number of properties and spread their risk.
Baldeep Gill is an independent agribusiness consultant
baldeep.gill@bigpond.com