financial performance of farms -...

abare conference paper 05.21 abare project 1193 ISSN 1447-3666 abare

Financial performance of farmsin the Central Northern Wheat Belt of Western Australia

Paul Phillips, Richard Perry, Peter Martin and Phantipa Puangsumalee

In this paper, the Central Northern Wheat Belt of Western Australia has been defined as the area of Western Australian incorporating shires from Moora in the north to Narrogin in the south and from Northam and York in the west to Merredin in the east.

Major regional centres in the region include Moora, Merredin, Northam and Narrogin.

abare conference paper 05.21 abare project 1193 ISSN 1447-3666 abare

1 The Central Northern Wheat Belt

Merredin

Moora

Northam

Narrogin

GPO Box 1563 • Canberra • 2601 • Australia • Fax +61 2 6272 2001 • Tel +61 2 6272 2000 • www.abareconomics.com

western australiaREGIONAL OUTLOOK CONFERENCE

24 August 2005

abare conference paper 05.21

�

Regional profile

The Central Northern Wheat Belt is heavily reliant on wheat production but also derives a large proportion of income from wool, sheep and lamb sales. The total value of agricultural production from the region was an estimated $1.85 billion in 2001-02. Just over a third of the gross value of agricul-tural production is contributed by wheat. Wool is the next most important commodity, contributing around 18 per cent of the gross value of agricultural production in 2000-01. Sheep and lamb sales contributed around 12 per cent and barley, lupins, beef cattle, canola, hay and oats each contributed around 3 per cent.

In 2002-03, the region’s gross value of agricultural production fell by around 4 per cent to $1.78 billion as a consequence of widespread drought. The contribution of wheat in particular was sharply reduced (figure A).

The principal agricultural commodi-ties produced in the Central Northern Wheat Belt, including wheat, wool, sheep meat and beef, are traded internationally by Australia (figure B). As much of the region’s economic prosperity is reliant on the agriculture sector, and because of the

A Value of selected commodities

$m 200 400 800600

2000-01

2002-03

Wheat

Wool

Sheep, lambs

Barley

Lupins

Beef cattle

Canola

Hay

Oats

Central Northern Wheat Belt, Western Australia

B Export shares of principal regional commodities, by volume, 2004-05

DomesticconsumptionExport

Wool Wheat Mutton Beef Lamb

%

20

40

60

80

C Employment shares, by sector, 2001

%

Communication services

Mining

Accommodation, cafes, restaurants

Government administration and defence

Manufacturing

Construction

Health community service

Education

Retail trade

Agriculture, forestry, fishing

5 10 15 20 25 30

Central Northern Wheat BeltAustralia


�

export orientation of the principal commodities produced, a direct link exists between world market conditions and the local Central Northern Wheat Belt economy.

The agriculture sector is the most important provider of employment in the Central Northern Wheat Belt. According to 2000-01 employment statistics from the Australian Bureau of Statistics, the agriculture sector employed around 33 per cent of the workforce, or 10 000 people, in 2001. This is almost 7000 people more than the next most important sector — retailing — that employed around 11 per cent of the workforce.

Broadacre farm performanceIn this section the financial performance of broadacre farms in the Central Northern Wheat Belt is considered, along with the performance of broadacre farms in Western Australia and nationally. Broadacre farms account for more than 94 per cent of farms in the Central Northern Wheat Belt (table 1).

The broadacre sector of agriculture is defined to include five industry types: wheat and other crops, mixed livestock–crops, sheep, beef and sheep–beef. In simple terms, broad-acre farms are those that run beef cattle or sheep or grow grains, pulses or oilseeds or some combination of these activities.

According to the Agricultural Census conducted by the Australian Bureau of Statistics, in 2001 there were 5077 farms in this region, of which 40 per cent combined grain growing with production of livestock, most usually sheep. This share was significantly higher than the national average of 12 per cent. The representation of beef cattle farming in the region (with only 5 per cent of farms) is significantly lower than the national average (24 per cent of farms).

1 Number of farms, by industry classification, �001

CentralNorthernWheatBelt, WesternAustralia Australia

no. % no. %BroadacreindustriesGrain–livestock farming 2 018 40 18 500 12Grain farming 1 822 36 17 087 11Sheep farming 529 10 14 891 10Beef cattle farming 238 5 36 297 24Sheep–beef farming 127 3 9 903 7

OtherindustriesPig farming 58 1 1 235 1Grape growing 53 1 7 162 5Dairy cattle farming 4 0 14 515 10Other industries 228 4 31 559 21

Allindustries 5 077 100 151 149 100

Source: Australian Bureau of Statistics, Agricultural Census 2001.


�

There is a relatively low proportion of small farms in the region compared with the national average. Just over 32 per cent of farms had a total value of agricultural output of less than $150 000, with about 14 per cent of farms having a value of agricul-tural output of less than $50 000 (figure D). This compares with 67 per cent and 45 per cent nationally.

The majority of the region’s agricultural output is produced by medium size and large farms. Around half of the gross value of agricultural production is from farms that have a gross value of agricultural produc-tion of between $150 000 and $600 000. The 15 per cent of farms with a value of agricultural production of more than $600 000 produce over 43 per cent of the agricultural output.

National broadacre farm performanceThe financial performance of Australian broadacre farms generally improved in 2003-04 and 2004-05 as the drought, which was most severe and widespread in 2002-03, receded in parts of Australia. Over these years, prices for livestock remained high in historical terms, assisting farmers to manage cash flow at a time of reduced production. High beef cattle prices over the past three years have been particularly important in maintaining or improving farm incomes because more Australian farms carry beef cattle than engage in any other farming enterprise.

In 2003-04, average farm cash income for the broadacre industries across Australia increased from the drought reduced income in 2002-03 to slightly above the long term average in real terms (figure E). Near record winter crop receipts in a number of states, including Western Australia, and high livestock receipts more than offset increases in total farm cash costs.

However, in 2004-05, reduced grain produc-tion resulting from drier seasonal condi-tions, combined with lower grain and wool prices, are estimated to have led to a fall in average farm cash income for Australian broadacre farms. In real terms, farm cash incomes fell by around 11 per cent to just below the long term average and similar to farm cash income in 1999-2000 (figure E).

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,

D Distribution of farms, by value of production, 2001

%

5

10

15

20

25

30

35 Share of farms

Share of total value of agricultural production

Lessthan$50k

$50k to

$150k

$150to

$300k

$300kto

$600k

$600kto

$1m

morethan$1m

E Farm cash income Broadacre farms

2004-05 $’000

20

40

60

80

100

120

140

160

Australia

Western Australia

1979-80

1984-85

1994-95

1989-90

1998-99

2004-05


�

but excluding capital payments and payments to family workers. A longer term measure of profitability that takes account of capital depreciation and changes in inventories of live-stock, fodder, grain, wool etc is farm business profit. Farm business profit for the broadacre industries is also estimated to have fallen in 2004-05 and by a slightly larger amount than the reduction in farm cash income. Overall, no increase is expected in inventories of live-stock on farms, and grain and wool stocks are expected to fall.

Strong demand for rural land in 2002-03 and 2003-04 resulted in rising capital values, offsetting the impact of increases in working capital debt on farm equity and historically low interest rates assisted debt servicing. Rising farm capital values in recent years have resulted in reduced rates of return excluding capital appreciation, but have led to histori-cally high rates of return including capital appreciation.

Western Australian broadacre farm performanceHistorically, farm cash incomes for Western Australian broadacre farms have exceeded the national average. In part, this is a consequence of the large average enterprise size of Western Australian farms, compared with broadacre farms nationally. Lower winter crop production in Western Australia in 2004-05 is projected to result in a fall in farm cash income. Record winter crop production in Western Australia in 2003-04 led to very high farm cash incomes. Many grain producers in Western Australia, and to lesser extent in South Australia and Victoria, opted to receive a substantial proportion of the receipts from the 2003-04 crop in 2004-05. As a consequence, average farm cash incomes for broadacre farms in these states are estimated to be higher than would be expected based on the reduc-tions to crop production and prices.

Grains industry farmsFollowing the drought affected crop in 2002-03, farm incomes rebounded strongly in Western Australia, as in Victoria and South Australia in 2003-04, but crop production remained below average in southern New South Wales and Queensland. Record winter crop production in 2003-04 in Western Australia combined with relatively strong grain prices to result in very high farm cash incomes.

In 2004-05, crop production in Western Australia was reduced by variable seasonal conditions, with frost and dry conditions experienced in many parts of the state. Lower winter crop production combined with reduced grain prices is estimated to have resulted in a fall in farm cash income in Western Australia in 2004-05 (figure F). Despite the reduction, incomes remain rela-tively high in historical terms.

Sheep industry farmsOverall, the financial performance of Aus-tralian sheep industry farms is estimated to have improved slightly in 2004-05, despite

F Farm cash income Grains industry

2004-05 $’000Australia

Western Australia

1979-80

1984-85

1994-95

1989-90

1998-99

2004-05

Farm cash income Grains industry

50

100

150

200

250


�

a fall in receipts from wool. Receipts from the sale of sheep and lambs, and a reduc-tion in expenditure on sheep purchases are expected to more than offset lower wool receipts and result in farm cash income rising, but remaining below the long term average.

The pattern of change in farm cash incomes for sheep farms in Western Australia mostly follows that observed nationally (figure G), despite there being some distinct influences on the Western Australian sheep industry. In particular, Western Australian sheep farms have typically sold a higher proportion of their sheep for live export. More than 80 per cent of the sheep sent for live export from Australia in 2004 were sourced from Western Australian farms.

In 2003-04 and 2004-05, farm cash income for Western Australian sheep industry farms has exceeded that recorded nationally, partly because of the larger scale of sheep industry farms in Western Australia and generally better seasonal conditions in the south western part of the state. However, farm cash incomes in pastoral areas have generally remained low following substantial destocking during 2002 and 2003.

Regional farm performanceFarm cash income for broadacre farms in the Central Northern Wheat Belt of Western Australia is estimated to have followed a similar pattern to that for the whole of Western Australia in recent years (table 2).

Farm cash income for mixed livestock–crops farms have generally displayed less vari-ability than farm cash income for specialist grains farms (figure H). In addition, farm cash incomes for grain specialist farms have generally exceeded those of the mixed live-stock–crops farms, in part because of the larger scale of the specialist grain farms.

Investment and land valuesImprovement in farm financial performance during the 1990s resulted in a steady increase in the real value of farm land in the Central Northern Wheat Belt of Western Australia (figure I). A large increase in the number of producers acquiring additional land to expand their enterprises after 1997-98 and peaking in 2001-02 led to a relatively sharp rise in land values, particularly in 2002-03

G Farm cash income Sheep industry

2004-05 $’000Australia

Western Australia

1979-80

1984-85

1994-95

1989-90

1998-99

2004-05

20

40

60

80

100

120

H Farm cash income

2004-05 $’000

1979-80

1984-85

1994-95

1989-90

1998-99

2004-05

Specialist grain farms

Mixed livestock–crops farms50

100

150

200

250

300

350



�

(figure J). Increases in land values have resulted from a number of factors, including higher farm incomes and lower interest rates as well as the general increase in property prices in Australia since 1997.

While land values have historically fallen during prolonged periods of low farm cash income, resulting mainly from low commodity prices, land prices have rarely fallen because of shorter term adverse seasonal conditions such as widespread frost in 2000-01 and short term drought.

Broadacre producers acquiring additional land in recent years have, on average, been younger and operate properties that generate better than average rates of return in the period prior to land acquisition.

2 Physical and financial performance of broadacre farms Average per farm

CentralNorthernWheatBelt, WesternAustralia WesternAustralia

2002-03 2003-04p 2004-05s 2002-03 2003-04p 2004-05sPhysicalWheat area sown ha 783 872 919 485 576 607Wheat yield per hectare sown tonnes 0.8 2.0 1.5 0.9 2.0 1.5Barley area sown ha 184 168 183 140 137 132Barley yield per hectare sown tonnes 0.9 2.4 1.8 1.1 2.4 1.9Grain legumes area sown ha 138 114 82 99 83 79Sheep numbers at 30 June no. 2 865 2 577 2 700 2 705 2 839 2 813Sheep and lambs sold no. 1 222 1 396 1 236 928 1 143 1 227Wool production kg 13 933 13 760 12 615 12 216 13 619 13 159Beef cattle numbers at 30 June no. 63 74 105 219 213 241Beef cattle sold no. 21 31 39 82 76 85

continued

J Farms expanding

1978-79

1983-84

1993-94

1988-89

1998-99

2003-04

proportion of producers acquiring extra land

2

4

6

8

10

12AustraliaWestern Australia

%

I Farm cash incomes and land values

1978-79

1983-84

1993-94

1988-89

1998-99

2003-04


2004-05$/ha

Land valuesleft axis

200

400

600

800

2004-05$/ha

20

40

60

80

Farm cash incomeright axis


�

2 Physical and financial performance of broadacre farms continued Average per farm

CentralNorthernWheatBelt, WesternAustralia WesternAustralia

2002-03 2003-04p 2004-05s 2002-03 2003-04p 2004-05sCashreceiptsWheat $ 226 980 351 300 281 000 159 360 230 700 194 000Barley $ 39 280 59 300 52 000 37 570 47 700 41 000Grain legumes $ 7 310 16 500 13 000 13 880 16 000 15 000Oilseeds $ 9 050 8 000 6 000 20 300 24 600 20 000Other crops $ 20 050 19 900 16 000 11 390 11 900 9 000Sheep and lamb sales $ 70 740 79 800 66 000 54 410 66 500 66 000Wool sales $ 85 110 64 500 60 000 76 070 68 200 59 000Beef cattle sales $ 12 030 15 200 20 000 46 540 44 400 53 000Other cash receipts $ 31 080 36 600 35 000 26 020 33 900 34 000

Total cash receipts $ 501 640 651 000 551 000 445 530 543 900 491 000

CashcostsSheep and lamb purchases $ 12 120 29 600 10 000 11 800 21 800 8 000Beef cattle purchases $ 1 780 400 2 000 8 430 6 800 7 000Fodder $ 6 470 3 900 4 000 6 260 4 200 5 000Fertiliser $ 81 410 79 800 85 000 63 230 70 400 74 000Sprays $ 49 500 51 800 53 000 33 920 40 100 40 000Fuel, oil and lubricants $ 29 640 29 800 34 000 23 410 25 600 29 000Repairs and maintainance $ 39 380 39 500 37 000 34 000 34 700 31 000

Total cash costs $ 411 000 395 600 411 000 351 540 362 000 372 000

FinancialperformanceTotal cash receipts $ 501 640 651 000 551 000 445 530 543 900 491 000less total cash costs $ 411 000 395 600 411 000 351 540 362 000 372 000Farm cash income $ 90 650 255 400 140 000 94 000 181 900 119 000

Farm business profit $ –12 450 167 500 27 000 16 860 104 400 22 000

Proportion of farms with negative farm cash income % 28.1 14.3 15.6 35.0 15.7 14.0

Rate of return – excl. capital appreciation % 1.0 7.4 2.1 2.1 5.2 1.9– incl. capital appreciation % 7.3 16.1 na 7.2 15.3 na

FarmcapitalanddebtTotal capital value $ 3 246 340 3 273 500 na 3 053 370 3 366 600 naFarm debt $ 336 600 319 100 359 000 332 170 361 600 371 000Total closing harvest loan $ 37 510 58 100 na 27 660 33 400 na

Equity ratio at 30 June % 75 89 na 77 87 na

OtherLiquid assets including FMD at 30 June a $ 132 240 200 200 na 139 110 196 900 naFarm Management Deposits at 30 June $ 17 730 33 900 na 18 360 34 500 naShare of farms holding FMD at 30 June a % 12 25 na 13 25 na

Off-farm income $ 30 120 32 200 na 35 070 28 800 na

a FMD = Farm Management Deposits. p Preliminary estimate. s Projection based mainly on November telephone surveys. na Not available.


�

Commodity forecasts

ABARE’s assessment of the outlook for world economic growth is provided in Austra-lian Commodities — ABARE’s quarterly commodity forecasts and issues journal. Also included in Australian Commodities are market forecasts and detailed discussions on major Australian agricultural, minerals and energy commodities. A copy of the June quarter issue of Australian Commodities is included in delegate satchels.

Seasonal updateWidespread above average rainfall was received in June 2005 across eastern Australia and South Australia, as shown in the map supplied with this paper. With a dry and warm summer and autumn in these states, the above average rainfall was beneficial to both pasture growth and winter crop plantings.

The June rainfall aided those crops that were dry sown and provided an opportunity for some additional late sowing to occur. This has improved the outlook for Australian winter crop production in 2005. This above average winter rainfall will be beneficial for pasture growth as the temperature increases in spring. This improved pasture will allow for some herd and flock retention and possible rebuilding of herds and flocks.

The Australian Bureau of Meteorology in its latest seasonal rainfall outlook (16 August 2005) for the September–November period indicates a neutral likelihood of above or below average rainfall over most of eastern Australia but with increased probability of below average rainfall in western Victoria and much of the agricultural zone of South Australia. In Western Australia the chances of receiving at least median spring rainfall are close to 50 per cent.

Commodity forecast summariesFor the principal commodities produced in the Central Northern Wheat Belt of Western Australia — wheat, wool, beef and sheep meat — updated summaries of the discussions from the June Australian Commodities are provided below.

Grains and oilseedsWorld grain and oilseeds production is forecast to decline from record levels in 2005-06, as production in some of the major producing countries is forecast to fall. The decline in production is forecast to place upward pressure on world prices. The world indicator price for wheat (US hard red winter, fob Gulf ports) is forecast to average US$159 a tonne in 2005-06, while for coarse grains, the world indicator price (US corn, fob Gulf) is forecast to increase by 4 per cent to average US$101 a tonne. Reflecting the expected decline in world oilseeds production, the world indicator price (soybeans, cif, Rotterdam) is forecast to increase to average US$285 a tonne in 2005-06.

Feed grain prices in Australia increased to a high of around $230 a tonne in early June 2005. Following the above average rainfall in June, feed grain prices started to decline. In mid-July, feed wheat prices had fallen to $210 a tonne and feed barley to $220 a tonne.


10

However, reflecting the movement in world grain prices, Australian grain and oilseed prices are forecast to increase in 2005-06. The pool return for Australian premium white (APW) wheat is forecast to increase by 9 per cent to $218 a tonne in 2005-06. Domestic feed barley prices are forecast to increase by 21 per cent to $205 a tonne in 2005-06 and malting barley prices are forecast to increase by 19 per cent to $238 a tonne. The price for canola is fore-cast to increase by 5 per cent to $368 a tonne in 2005-06.

WoolDespite only small changes in Australian wool production, Australian wool prices have eased fairly consistently over the past thirty months, falling from 1172 cents a kilogram in January 2003 to 713 cents a kilogram in June 2005. Largely reflecting this trend, the eastern market indicator price for wool is forecast to average 720 cents a kilogram (clean) in 2005-06, down 3.5 per cent from 2004-05.

Looking beyond the short term, the principal demand factors affecting the outlook for wool remain largely unchanged and are dominated by changing consumer preferences, compe-tition from alternative fibres and low economic growth in key European markets. On the supply side, the key issues remain the improving economics of sheep meat production as well as the relative returns available from cropping.

BeefA key development in the current outlook for the Australian beef industry is the timing of the resumption of beef trade between Japan and the United States. In the June outlook it was assumed that beef trade between the United States and Japan would resume in early 2006.

A resumption of trade between the United States and Japan in early 2006 would be expected to have two key outcomes. First, beef prices in Japan would be expected to fall because of increased Japanese beef imports, primarily from the United States, for the remainder of 2005-06. Second, the volume of Australia’s beef exports to Japan in 2005-06 would fall. Combined, these outcomes would result in lower returns from Australian beef exports to Japan.

Although export returns are forecast to decline in early 2006, they are expected to remain high enough to encourage the rebuilding of the Australian cattle herd. In addition, if seasonal conditions in 2005-06 return to average, as assumed, the Australian cattle herd would be expected to increase slightly by July 2006.

With greater retention of cattle, Australian cattle slaughter in the first half of 2006 would be expected to decline compared with the first half of the financial year. As a result, strong domestic demand is expected to provide some support for saleyard prices.


11

Sheep meat

Sheep meat is an increasingly important coproduct of wool operations, although over recent years in some areas, wool might rightly be considered a coproduct of sheep operations. In 2004-05, sheep meat contributed 43 per cent of the combined value of production from Australia’s sheep flock — that is, the combined value of sheep meat, live exports and wool production.

The outlook for sheep meat remains generally positive, particularly over the longer term, and hence sheep meat production will continue to be important to the overall returns of sheep operations. However, lamb saleyard prices are forecast to average 1 per cent lower in 2005-06, at 342 cents a kilogram (dressed weight equivalent), while mutton prices are forecast to fall by 5 per cent to average 154 cents a kilogram.

Two factors are particularly important to the short term (2005-06) outlook for sheep meat. These are seasonal conditions and developments in the beef market relating to the uncertain timing of the resumption of the beef trade between the United States and Japan.

Improved seasonal conditions in the eastern states and South Australia will encourage restocking activity, raising demand for ewes, reducing turnoff of adult sheep and raising saleyard sheep prices. Further, if the US–Japan beef trade does not resume in early 2006 as assumed by ABARE, higher beef prices in concert with tight lamb supplies could result in lamb prices increasing in 2005-06.


1�

2 Australian rainfall deciles, June 2005

Source: Bureau of Meteorology

Highest on record

Decile ranges

1

10

8–9

4–7

2–3

Lowest on record

Very much above average

Very much below average

Above average

Below average

Average

3 Chance of exceeding the median rainfall, September to November 2005

50% 50%

50%

45%

45%

40%

45%

55%

80%75%70%65%60%55%50%45%40%35%30%25%20%

Source: Bureau of Meteorology

financial performance of farms -...

Documents