physical and financial performance benchmarks for...

Physical and financial performance benchmarks for grain producing

farms, Western Australian eastern agroecological zone

www.aba re s . gov. auS c i e n c e a n d e c o n o m i c s f o r d e c i s i o n - m a k e r s

Australian Bureau of Agricultural and Resource Economics and Sciences

Australian Government

ABARES report prepared for the Grains Research and Development Corporation

Stephen Hooper, Caroline Levantis and Therese Formosa

February 2011

ii

© Commonwealth of Australia 2011

This work is copyright. The Copyright Act 1968 permits fair dealing for study, research, news reporting, criticism or review. Selected passages, tables or diagrams may be reproduced for such purposes provided acknowledgment of the source is included. Major extracts or the entire document may not be reproduced by any process without the written permission of the Executive Director, ABARES.

The Australian Government acting through the Australian Bureau of Agricultural and Resource Economics and Sciences has exercised due care and skill in the preparation and compilation of the information and data set out in this publication. Notwithstanding, the Australian Bureau of Agricultural and Resource Economics and Sciences, its employees and advisers disclaim all liability, including liability for negligence, for any loss, damage, injury, expense or cost incurred by any person as a result of accessing, using or relying upon any of the information or data set out in this publication to the maximum extent permitted by law.

Hooper, S, Levantis, C and Formosa, T 2011, Physical and financial performance benchmarks for grain producing farms, Western Australian eastern agroecological zone, ABARES report prepared for the Grains Research and Development Corporation, Canberra, February.

Australian Bureau of Agricultural and Resource Economics and Sciences Postal address GPO Box 1563 Canberra ACT 2601 Australia Switchboard +61 2 6272 2010 Facsimile +61 2 6272 2001 Email [email protected] Web abares.gov.au

ABARES project 43145

The Australian Bureau of Agricultural and Resource Economics and Sciences (ABARES) was formed following the merger of the Australian Bureau of Agricultural and Resource Economics (ABARE) and the Bureau of Rural Sciences (BRS) in 2010–11.

iii

ContentsIntroduction 1

Broadacre production in the Western Australian eastern zone 3

Farm financial performance 4

Socioeconomic benchmarks 6

Farm performance benchmarks 7

Survey methods and definitions 17

Maps

1 GRDC agroecological zones 1

Tables1 Agricultural production in the Western Australian eastern zone 3

2 Summary of financial performance: Western Australian eastern zone 4

3 Socioeconomic benchmarks: Western Australian eastern zone 7

4 Physical performance benchmarks and prices: Western Australian eastern zone 15

5 Financial performance benchmarks: Western Australian eastern zone 16

Figuresa Farm business profit, Western Australian eastern zone 5

b Rate of return on capital at full equity, excluding capital appreciation, Western Australian eastern zone 6

c Annual rainfall, Western Australian eastern zone 8

d Land use intensity, Western Australian eastern zone 8

e Proportion of farm area sown to crops, Western Australian eastern zone 9

f Average grain yield per hectare sown, Western Australian eastern zone 10

g Average price received for grain, Western Australian eastern zone 11

h Water use efficiency, Western Australian eastern zone 13

i Total cost to value of output ratio, Western Australian eastern zone 14

1

Western Australian eastern ABARES

IntroductionIn May 2010 the Grains Research and Development Corporation (GRDC) commissioned ABARE (now ABARES) to use data from its extensive Australian agricultural and grazing industries survey (AAGIS) to develop a range of physical and financial performance benchmarks for each GRDC agroecological zone (map 1). The objective of this study is to enhance grain producers’ and consultants’ awareness of the financial performance of grain producing farms and of the key factors driving the stronger results of the better performing farms.

The analysis has been conducted separately for each of the 13 agroecological zones (map 1) for the three-year period 2006–07 to 2008–09. In addition, data for the period 1978–79 to 2008–09 are presented for selected variables to provide a longer term perspective. This report presents the results of the analysis for the Western Australian eastern agroecological zone.

The current analysis divides the grain industry into two sectors—specialist grain producing farms and mixed enterprise grain producing farms. Farms classified as being in the wheat and other crops industry (box 1) are referred to as specialist grain farms. Any broadacre farm surveyed by ABARES that is not classified as being in the wheat and other crops industry but that planted more than 40 hectares of grain crops is classified as a mixed enterprise grain farm.

ABARES (formerly ABARE) has conducted the AAGIS annually since 1977–78 to collect detailed physical, financial and socioeconomic data from broadacre farms. As well as the standard farm financial performance variables reported in ABARES publications, additional benchmarks from

GRDC agroecological zonesmap 1

WA Mallee and Sandplain

WA northern

WA eastern

WA central

SA mid-north – lower Yorke and Eyre

SA Vic Mallee

SA Vic Bordertown–Wimmera

Vic high rainfall and Tas grains area

NSW Vic slopes

NSW central

NSW north-west Qld south-west

Qld central

NSW north-east Qld south-east

2


the existing database were developed to enable comparison between farms of different scales of operation. These benchmarks fall into three broad categories:

• Whole-of-farm benchmarks—including farm size, rainfall, land use intensity, enterprise mix, rate of return and a range of farm financial performance variables expressed on a per hectare operated basis to enable a direct comparison between farms of different scales.

• Enterprise-specific benchmarks—including grain yields, livestock reproduction rates, wool production per head shorn and the average price received for each commodity produced.

• Socioeconomic benchmarks—covering the age, education and off-farm employment of the operator and spouse. In addition, the total off-farm income of the operator and spouse is estimated.

This report comprises four main sections, starting with a brief discussion of the value of broadacre agriculture in the Western Australian eastern agroecological zone. This is followed by a discussion of farm financial performance (covering farm cash income, farm business profit and rate of return) and socioeconomic benchmarks. The main body of the report contains a detailed discussion of the main performance benchmarks of the top performing farms in the zone.

Performance benchmarks for the average and top performing farmsIn this research, the GRDC was interested in obtaining an increased understanding of the factors driving the performance of top performing farms. To address this, the top performing farms in each sector were identified by ranking the surveyed farms by rate of return on capital excluding capital appreciation. For all zones, the top performing farms were defined as the top 10 per cent of farms based on rate of return within the specified three-year period. In some zones the top 10 per cent was not a representative sample, so the cut-off was increased to the top 20 or 30 per cent of farms. Where the top 30 per cent of farms did not result in a representative sample, the analysis of the top performing farms was not undertaken.

The superior financial performance of the top performing farms in each group is likely to be the result of a number of factors including differences in the scale of the farm, the natural resources on the farm lands and management decisions and practices. The effect of these

box 1 Broadacre farms’ industry classification

Wheat and other crops industry (ANZSIC06 Class 0146 and 0149) includes farms engaged mainly in growing rice, other cereal grains, coarse grains, oilseeds and/or pulses.

Mixed livestock–crops industry (ANZSIC06 Class 0145) includes farms engaged mainly in running sheep, beef cattle or both and growing cereal grains, coarse grains, oilseeds and/or pulses.

Sheep industry (ANZSIC06 Class 0141) includes farms engaged mainly in running sheep.

Beef industry (ANZSIC06 Class 0142) includes farms engaged mainly in running beef cattle.

Sheep–beef industry (ANZSIC06 Class 0144) includes farms engaged mainly in running both sheep and beef cattle.

3


differences may be reflected in the farm’s overall production, enterprise mix, prices received or cost of production. To investigate this further, a series of physical and financial performance benchmarks were used for each of the four groups:

• specialist grain farms• top performing specialist grain farms• mixed enterprise grain farms• top performing mixed enterprise grain farms.

Broadacre production in the Western Australian eastern zoneIn the three financial years to 2008–09, an estimated 259 broadacre farms produced grain in the Western Australian eastern agroecological zone (table 1). Two-thirds of these farms were classified as being specialist grain farms and one-third as mixed enterprise grain farms. During this period, grain producing farms in the zone produced grain crops worth an estimated $155 million a year. Wheat and barley were the two most commonly grown grain crops, accounting for 88 per cent and 8 per cent, respectively, of the total value of crop production. In addition, broadacre grain producing farms in the zone sold a diverse range of livestock and livestock products, with the sale of sheep, lambs and wool contributing $32 million a year to the value of farm output in the three years to 2008–09.

1 Agricultural production in the Western Australian eastern zone average per financial year over the period 2006–07 to 2008–09

specialist mixed enterprise all broadacre grain farms grain farms grain farms

contribution all farms all farms all farms of top 30% a

Average number of farms 174 86 259 Sample number 13 9 22

Gross value of: $m $m $m %Grain crop sales 109 45 155 67– wheat 101 36 137 67– barley 5 7 12 52– oats 3 0 3 90– pulses 0.3 0.1 0.4 0– other grain crops 0.0 0.2 0.2 0

Livestock sales 21 11 32 39– sheep and lambs 14 4 18 37– wool 7 7 14 42

a Contribution of the top 30 per cent of farms (according to rate of return, excluding capital appreciation) to the sector in the zone. Source: ABARES, Australian agricultural and grazing industries survey.

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When farms in both sectors of the grain industry were distributed by rate of return excluding capital appreciation, the top 30 per cent of farms accounted for two-thirds of the value of grain sold by broadacre grain farms in the Western Australian eastern zone. However, there is insufficient sample in the survey to generate reliable benchmarks for the top performing farms in both the specialist and mixed enterprise grain sectors. Hence, the analysis for this zone focuses on the financial performance of grain farms in the specialist and mixed enterprise sectors as a whole.

Farm financial performance During the three years to 2008–09, grain producing farms in both sectors of the grain industry in the Western Australian eastern agroecological zone realised strong farm cash incomes but small farm business losses (table 2). On average, specialist grain farms annually generated farm cash receipts of around $712 000 a farm, with around 80 per cent coming from the sale of grain crops. Sales of wheat accounted for around 92 per cent of crop receipts, with barley representing a further 5 per cent. Sales of sheep, lambs and wool contributed a further 17 per cent of farm cash receipts during this period. In comparison, mixed enterprise farms generated

2 Summary of financial performance: Western Australian eastern zone, 2006–07 to 2008–09, by industry average per farm

mixed enterprise specialist grain farms grain farms

average average

Farm cash receipts $ 712 465 (23) 723 553 (15)

– crops $ 571 154 (28) 538 077 (18)

– sheep and lambs $ 79 625 (36) 47 312 (18)

– wool $ 39 483 (17) 81 663 (26)

less Farm cash costs $ 572 297 (16) 619 228 (20)

– contracts $ 4 540 (37) 10 460 (54)

– crop and pasture chemicals $ 71 259 (18) 79 506 (21)

– fuel, oil and grease $ 50 726 (15) 54 407 (27)

– fertilisers $ 108 344 (16) 136 636 (19)

– interest payments $ 93 485 (13) 55 904 (31)

– repairs and maintenance $ 39 007 (8) 65 391 (33)

Farm cash income $ 140 168 (113) 104 325 (94)

plus build-up in trading stocks $ –13 502 (112) 13 727 (75)

less depreciation $ 114 566 (10) 95 688 (6)

less imputed cost of family labour $ 51 274 (7) 55 766 (7)

Farm business profit $ –39 174 (407) –33 402 (288)

Farm business profit at full equity $ 62 931 (258) 42 016 (185)

Rate of return at full equity – excluding capital appreciation % 1.4 (260) 1.1 (185)

– including capital appreciation % 0.9 (398) 1.1 (210)

Note: Figures in parentheses are relative standard errors (RSEs), which are standard errors expressed as a percentage of the estimate provided. A guide on how to use RSEs is in the survey methods and definitions section.

5


annual receipts of almost $724 000, with almost 75 per cent coming from the sale of crops. Wheat and barley were the two most important crops grown during this period, representing 83 per cent and 13 per cent, respectively, of total crop receipts. Livestock sales contributed a further 18 per cent of farm cash receipts, with wool sales accounting for almost two-thirds of these farms’ livestock receipts.

Since peaking in the late 1980s and early 1990s, farm business profit in the specialist sector has been volatile (figure a). Specialist grain farms, on average, realised losses in the three years to 2008–09—averaging almost $40 000 a farm. Although farms in the mixed enterprise sector also realised losses over this period, this has been a consistent feature of the average performance of farms in this sector over the past 30 years.

Reflecting the recent weakness in farm financial performance and the rapid growth in farm capital values over the past decade, the average rate of return on capital in the specialist grain sector has fallen steadily since peaking in the late 1980s (figure b). In contrast, the rate of return for mixed enterprise grain farms has fluctuated, averaging around 0 per cent for much of the past two decades.

Farm business pro�t, Western Australian eastern zone

2008–09$‘000

a

–100

200

100

300

400

500

2006

–07

to 2

008–

09

1997

–98

to 1

999–

2000

2000

–01

to 2

002–

03

2003

–04

to 2

005–

06

1985

–86

to 1

987–

88

1988

–89

to 1

990–

91

1991

–92

to 1

993–

94

1994

–95

to 1

996–

97

1979

–80

to 1

981–

82

1982

–83

to 1

984–

85

2006

–07

to 2

008–

09

1997

–98

to 1

999–

2000

2000

–01

to 2

002–

03

2003

–04

to 2

005–

06

1985

–86

to 1

987–

88

1988

–89

to 1

990–

91

1991

–92

to 1

993–

94

1994

–95

to 1

996–

97

1979

–80

to 1

981–

82

1982

–83

to 1

984–

85

specialist grain farms mixed enterprise grain farms

average

6


Socioeconomic benchmarks The operators of the mixed enterprise grain farms and their spouses were younger than those of the specialist grain farms. Proportionately more operators of mixed enterprise grain farms had completed a trade apprenticeship or technical college course compared with their counterparts in the specialist sector. Almost 60 per cent of spouses in the mixed enterprise sector had completed a tertiary course, compared with only 3 per cent in the specialist sector. Together, the operator and spouse of mixed enterprise grain farms earned more than $58 000 a year from off-farm income sources during the period 2006–07 to 2008–09. In contrast, the survey data indicate that none of the specialist grain farm operators worked off farm during the three-year period to 2008–09. During this period, the operator and spouse of specialist grain farms earned almost $31 000 a year, principally from off-farm investments rather than from salaries.

Rate of return on capital at full equity, excluding capital appreciation,Western Australian eastern zoneb

–5

%

5

10

15

25

20

2006

–07

to 2

008–

09

1997

–98

to 1

999–

2000

2000

–01

to 2

002–

03

2003

–04

to 2

005–

06

1985

–86

to 1

987–

88

1988

–89

to 1

990–

91

1991

–92

to 1

993–

94

1994

–95

to 1

996–

97

1979

–80

to 1

981–

82

1982

–83

to 1

984–

85

2006

–07

to 2

008–

09

1997

–98

to 1

999–

2000

2000

–01

to 2

002–

03

2003

–04

to 2

005–

06

1985

–86

to 1

987–

88

1988

–89

to 1

990–

91

1991

–92

to 1

993–

94

1994

–95

to 1

996–

97

1979

–80

to 1

981–

82

1982

–83

to 1

984–

85specialist grain farms mixed enterprise grain farms

average

7


Farm performance benchmarks Farm financial performance in the Western Australian eastern agroecological zone over the past three decades has been influenced by a range of factors that have affected the farms’ underlying profitability (including factors like input and output prices, seasonal conditions, farm productivity and management decisions), as well as producers’ investments in land to boost the scale of the farming business. In this section, ABARES survey data are used to investigate the effect of changes in farm scale and farm profitability to improve industries’ understanding of the factors driving the performance of the farms in both sectors of the grain industry.

While the Western Australian eastern agroecological zone is a relatively dry zone, with annual rainfall generally between 300 millimetres and 350 millimetres, much of this rain falls during the winter cropping season. For this analysis, rainfall data were sourced from the Bureau of Meteorology, with each farm’s annual rainfall assumed to be the same as that observed at the nearest rainfall data collection point.

During much of the past three decades, producers in this zone have experienced an extended period of favourable winter crop growing conditions, with many producers receiving above average rainfall throughout the 1990s. However, in the early and late 2000s, conditions were much drier than normal, particularly during the winter cropping season. The average annual rainfall in the three years to 2008–09 was the lowest experienced in the past three decades.

3 Socioeconomic benchmarks: Western Australian eastern zone, 2006–07 to 2008–09, by industry


average averageOperator

Average age yr 63 (6) 58 (2)

Education – 1–4 years high school % 34 (35) 28 (69)

– 5–6 years high school % 57 (8) 39 (51)

– trade apprenticeship/technical college % 9 (124) 27 (0)

– tertiary % 0 (0) 6 (103)

Weeks of work off farm wks 0 (0) 0 (0)

Spouse Average age yr 60 (9) 55 (3)

Education – 1–4 years high school % 34 (35) 0 (0)

– 5–6 years high school % 63 (19) 34 (26)

– trade apprenticeship/technical college % 0 (0) 6 (103)

– tertiary % 3 (73) 59 (18)

Weeks of work off farm wks 5 (32) 29 (17)

Operator and spouse off-farm income $ 30 694 (25) 58 537 (26)


8


Annual rainfall, Western Australian eastern zonec

mm

100

200

300

400

500

2006

–07

to 2

008–

09

1997

–98

to 1

999–

2000

2000

–01

to 2

002–

03

2003

–04

to 2

005–

06

1985

–86

to 1

987–

88

1988

–89

to 1

990–

91

1991

–92

to 1

993–

94

1994

–95

to 1

996–

97

1979

–80

to 1

981–

82

1982

–83

to 1

984–

85

2006

–07

to 2

008–

09

1997

–98

to 1

999–

2000

2000

–01

to 2

002–

03

2003

–04

to 2

005–

06

1985

–86

to 1

987–

88

1988

–89

to 1

990–

91

1991

–92

to 1

993–

94

1994

–95

to 1

996–

97

1979

–80

to 1

981–

82

1982

–83

to 1

984–

85specialist grain farms mixed enterprise grain farms

average

Land use intensity, Western Australian eastern zoned

0123456789

10

Shee

p eq

uiva

lent

s pe

r hec

tare

ope

rate

d

2006

–07

to 2

008–

09

1997

–98

to 1

999–

2000

2000

–01

to 2

002–

03

2003

–04

to 2

005–

06

1985

–86

to 1

987–

88

1988

–89

to 1

990–

91

1991

–92

to 1

993–

94

1994

–95

to 1

996–

97

1979

–80

to 1

981–

82

1982

–83

to 1

984–

85

2006

–07

to 2

008–

09

1997

–98

to 1

999–

2000

2000

–01

to 2

002–

03

2003

–04

to 2

005–

06

1985

–86

to 1

987–

88

1988

–89

to 1

990–

91

1991

–92

to 1

993–

94

1994

–95

to 1

996–

97

1979

–80

to 1

981–

82

1982

–83

to 1

984–

85


average

9


Over the past three decades, land use intensity (see box 2) has changed significantly. In the early to mid-1990s, lower wool prices resulted in sheep returns falling and led to a sharp fall in sheep numbers and land use intensity. However, by the late 1990s, favourable seasonal conditions and rising grain returns relative to wool resulted in much of the resources freed up by the fall in sheep numbers being redirected into cropping activities. During the 2000s, many producers in the zone also changed the focus of their remaining sheep flock from wool to slaughter lamb production, resulting in land use intensity recovering to record levels in the mixed enterprise grain sector.

Reflecting the greater focus on grain production, the proportion of the farms’ area sown to grain crops increased steadily during the 1990s and 2000s, particularly among the mixed enterprise farms (figure e). However, in the specialist sector, the proportion of the farms’ cropping area sown to wheat fell during the 1990s and early 2000s as producers increased the proportion of the farms’ cropping area sown to pulses, particularly lupins. This reflected the release of new cultivars and greater awareness of the agronomic benefits of growing the crop in rotation with wheat. However, since 2002–03 when dry conditions had a greater effect on lupin crop performance, the area sown to the crop has fallen steadily as producers redirected land back into wheat production. In the late 2000s, pulses accounted for less than 2 per cent of the farms’ cropping area, compared with more than 12 per cent in the early 2000s. In the mixed enterprise sector, wheat, barley and oats consistently accounted for 90 to 95 per cent of the area sown to grain crops during the 1990s, with wheat the dominant crop sown.

Proportion of farm area sown to crops, Western Australian eastern zonee

%

average


2006

–07

to 2

008–

09

2000

–01

to 2

002–

03

2003

–04

to 2

005–

06

1994

–95

to 1

996–

97

1997

–98

to 1

999–

2000

1988

–89

to 1

990–

91

1991

–92

to 1

993–

94

2006

–07

to 2

008–

09

2000

–01

to 2

002–

03

2003

–04

to 2

005–

06

1994

–95

to 1

996–

97

1997

–98

to 1

999–

2000

1988

–89

to 1

990–

91

1991

–92

to 1

993–

94

20

40

60

80

100

10


Average grain yield per hectare sown, Western Australian eastern zonef

t/ha

average


2006

–07

to 2

008–

09

2000

–01

to 2

002–

03

2003

–04

to 2

005–

06

1994

–95

to 1

996–

97

1997

–98

to 1

999–

2000

1988

–89

to 1

990–

91

1991

–92

to 1

993–

94

2006

–07

to 2

008–

09

2000

–01

to 2

002–

03

2003

–04

to 2

005–

06

1994

–95

to 1

996–

97

1997

–98

to 1

999–

2000

1988

–89

to 1

990–

91

1991

–92

to 1

993–

94

0.20.40.60.81.01.21.41.61.82.0

box 2 Definitions of key terms and concepts

Land use intensity A proxy of the total resources used by agriculture is the measure ‘sheep equivalents’, which converts the resources used to produce sheep, beef cattle, dairy cattle and crops into a single unit. Insights into a farm’s land use intensity can be gained by expressing the sheep equivalent measure on a per hectare operated basis.

Average grain yield For each farm surveyed, this is calculated as the weighted average yield realised across all crop types grown.

Average grain price For each farm surveyed, this is calculated as the weighted average price received across all crop types grown.

Water use efficiency Provides insights into how successfully a farm operator has converted rainfall into farm production. It is defined as farm cash receipts plus the build-up in the value of trading stocks per hectare per 100 millimetres of rainfall.

Ratio of the value of Quantifies total outlays on all farm inputs to produce one dollar of output. inputs to outputs Changes in the ratio of inputs to outputs over time provide insights into changes in the farm’s profitability that are independent of changes in farm size. The value of farm inputs is calculated as total cash costs plus depreciation and the imputed value of unpaid family labour. The value of farm outputs is defined as farm cash receipts plus the build-up in the value of farm trading stocks.

11


Despite this, the average grain production per farm in the 2000s did not increase significantly. This reflects the effect of the drier conditions over the past decade, with drought causing grain yield volatility to increase. In the three-year periods ending in 2002–03 and 2008–09, the average grain yields (see box 2) realised by specialist grain farm operators fell to the lowest levels on record—averaging just less than 0.9 tonnes a hectare, compared with an average of 1.4 tonnes a hectare during the 1990s. In the mixed enterprise sector, yields were also highly variable during the 2000s, but the average grain yield realised in the three years to 2008–09 was higher than that of the specialist grain farm operators—averaging 1.1 tonnes a hectare.

Grain farms’ financial performance is also influenced heavily by grain prices, particularly for the specialist grain farms. Over much of the past three decades, the average real grain price (see box 2) fluctuated around $250 a tonne, with no strong trend apparent (figure g). Prices were relatively low in the late 1990s and mid-2000s, but strengthened significantly in the late 2000s. The higher average grain price realised in the three years to 2008–09 largely reflects international market developments, such as lower global cereal stocks relative to consumption and increased use of grain to produce ethanol and vegetable oils to produce biodiesel.

In addition to the grain industry, broadacre grain producing farms’ financial performance in the Western Australian eastern agroecological zone was also heavily influenced by developments in the sheep meat, wool and beef cattle industries, particularly for mixed enterprise grain farms. In the mixed enterprise grain sector, most farms reduced the focus on wool production, but wool nonetheless remained a significant source of income. This change in focus resulted

Average price received for grain, Western Australian eastern zoneg

2008–09$/t

50

100

150

200

250

300

350

average


2006

–07

to 2

008–

09

2000

–01

to 2

002–

03

2003

–04

to 2

005–

06

1994

–95

to 1

996–

97

1997

–98

to 1

999–

2000

1988

–89

to 1

990–

91

1991

–92

to 1

993–

94

2006

–07

to 2

008–

09

2000

–01

to 2

002–

03

2003

–04

to 2

005–

06

1994

–95

to 1

996–

97

1997

–98

to 1

999–

2000

1988

–89

to 1

990–

91

1991

–92

to 1

993–

94

12


in sheep numbers falling consistently throughout the 1990s. However, in the 2000s, rising lamb prices and sheep returns resulted in increased production of lambs for slaughter and some expansion in sheep numbers. During the 2000s, mixed enterprise grain farms sold 271 lambs a farm, 69 per cent more than during the 1990s and almost four times more than the average number sold during the 1980s. In real terms, the average price received by mixed enterprise grain farm operators for lambs has increased from an average of $25 a head in the late 1990s to $67 a head in the three years to 2008–09.

In the specialist sector, the response to the rising lamb prices was even stronger, with producers selling, on average, 518 lambs a farm in the three years to 2008–09 (table 4), around eight times more than in the late 1990s.

Despite the greater focus on lamb production, wool remains an important commodity for most farms in the zone. In the three years to 2008–09, mixed enterprise grain farm operators realised, on average, a significantly higher wool yield and average wool price than specialist grain farm operators.

The financial performance of a producer’s land allocation and production decisions is affected by more than just relative prices and yields. Seasonal conditions, particularly rainfall, affect crops and livestock differently. Crops depend on rain during a narrow growing season while rain is needed over a longer period for pasture growth for livestock production. Although poor rainfall during the grain growing season can result in crop failure or low yields, poor pasture growth because of a lack of rainfall can be supplemented with purchased (or stored) grain and fodder. In any year, maintaining or improving a farm’s financial performance depends on how effectively a producer can take into account rainfall patterns when making farming decisions (about enterprise mix between crops and livestock and the mix of crop types and cultivars sown). Water use efficiency (see box 2) is one benchmark that provides insights into how effectively a producer’s farming practices convert rainfall into output.

The estimated water use efficiency of specialist grain producing farms has fluctuated, averaging around $60 a hectare per 100 millimetres of rainfall from the mid-1990s to the late 2000s. This is around 20 per cent lower than the average water use efficiency realised during the 1980s, reflecting the decline in land use intensity during this period (figure d).

In the mixed enterprise grain sector, water use efficiency is estimated to have fallen sharply during the early to mid-1990s as a result of depressed wool prices and destocking of sheep. The estimated water use efficiency of these farms during the 1990s was also adversely affected by increased winter rainfall that was not associated with a corresponding increase in farm receipts. However, rising land use intensity because of increased production of grain crops during the late 1990s and rising slaughter lamb production during the 2000s resulted in the estimated water use efficiency of these farms increasing steadily and returning to levels not seen since the late 1970s and early 1980s. In the three years to 2008–09, water use efficiency of mixed enterprise grain farms is estimated to have risen to a new record of $66 a hectare per 100 millimetres, as higher grain and lamb prices offset the effect of the dry conditions on grain yields and livestock production.

13


Changes in water use efficiency over time are an important factor likely to influence the financial performance of these farms. However, differences in producers’ costs of production can also be a significant factor driving farm cash incomes and profits.

In the three years to 2008–09, specialist grain farm operators spent $114 a hectare on farm inputs, with the main cost categories being fertilisers; interest payments; chemicals; and fuel, oil and grease (table 5). In comparison, mixed enterprise grain farms spent significantly more on farm inputs during the three year period to 2008–09, averaging $164 a hectare. On a per hectare operated basis, these farm operators, on average, spent more across most categories of farm inputs than specialist grain farms. The exceptions were interest; handling and marketing charges; and shearing and crutching. However, proportionately, there was little difference in operators’ outlays on farm inputs between the mixed enterprise and specialist grain sectors.

While the costs of farm inputs per hectare operated may be higher for some farms, this could reflect either inefficiencies in the use of these inputs or a range of factors including differences in a farm’s enterprise mix or land use intensity. Another method of comparing the relative costs of farms with different scales of operation and enterprise mix is the ratio of the value of inputs to outputs (see box 2). A ratio of 80 indicates that the producer spent 80 cents on inputs to produce one dollar of output. Growth in the value of a farm’s output achieved through a smaller (greater) corresponding growth in expenditure on inputs is reflected in a lower (higher) ratio and stronger (weaker) farm financial performance. Furthermore, to maintain a stable value of inputs to outputs ratio, growth in the value of outputs needs to offset increases in input prices that occur over time.

Water use e�ciency, Western Australian eastern zoneh

2008–09dollars

dolla

rs p

er 1

00 m

m p

er h

ecta

re


average

2006

–07

to 2

008–

09

1997

–98

to 1

999–

2000

2000

–01

to 2

002–

03

1985

–86

to 1

987–

88

1988

–89

to 1

990–

91

1991

–92

to 1

993–

94

1994

–95

to 1

996–

97

1979

–80

to 1

981–

82

1982

–83

to 1

984–

85

2006

–07

to 2

008–

09

1997

–98

to 1

999–

2000

2000

–01

to 2

002–

03

1985

–86

to 1

987–

88

1988

–89

to 1

990–

91

1991

–92

to 1

993–

94

1994

–95

to 1

996–

97

1979

–80

to 1

981–

82

1982

–83

to 1

984–

85

2003

–04

to 2

005–

06

2003

–04

to 2

005–

06

25

50

75

100

125

14


Over the past three decades, the ratio of the value of inputs to outputs for specialist grain farms has fluctuated significantly. Furthermore, the ratio deteriorated during the 2000s, rising from an average of 90 cents per dollar of output during the 1980s and 1990s to average just over 100 cents per dollar of output during the 2000s. While this suggests that the profitability of these farms has deteriorated markedly, the deterioration is likely to have been mainly because of the effect of the drier conditions on production (figures a and i). This suggests that the decline in profitability and farm business profits observed in the survey data is likely to recover when seasonal conditions improve.

In the mixed enterprise grain sector, the ratio of the value of inputs to outputs has fluctuated between 100 and 120 cents per dollar of output produced throughout much of the past three decades (figure i). While no strong trend is apparent, the survey data suggest that there was some improvement in the ratio associated with the increase in slaughter lambs and, to a lesser extent, grain production in the late 1990s and early 2000s. However, the effect of the adverse seasonal conditions on grain and livestock production in the early and late 2000s makes it difficult to conclude whether that recovery would have been sustained, or strengthened with rising lamb and grain prices, had seasonal conditions been more favourable. Nevertheless, the apparent improvement in profitability did not result in the ratio falling below 100 and, as such, these farms generated negative farm business profits.

Total cost to value of output ratio, Western Australia eastern zonei

25

50

75

100

125

0

cent

s sp

ent o

n in

puts

per

dol

lar o

f out

put

(200

8–09

dol

lars

)

Total costs include total cash costs plus the imputed cost of family labour and depreciation. Value of output equals total cash receipts plus the build-up in the value of trading stocks.

2006

–07

to 2

008–

09

1997

–98

to 1

999–

2000

2000

–01

to 2

002–

03

2003

–04

to 2

005–

06

1985

–86

to 1

987–

88

1988

–89

to 1

990–

91

1991

–92

to 1

993–

94

1994

–95

to 1

996–

97

1979

–80

to 1

981–

82

1982

–83

to 1

984–

85

2006

–07

to 2

008–

09

1997

–98

to 1

999–

2000

2000

–01

to 2

002–

03

2003

–04

to 2

005–

06

1985

–86

to 1

987–

88

1988

–89

to 1

990–

91

1991

–92

to 1

993–

94

1994

–95

to 1

996–

97

1979

–80

to 1

981–

82

1982

–83

to 1

984–

85


average

15


4 Physical performance benchmarks and prices: Western Australian eastern zone, 2006–07 to 2008–09, by industry average per farm


average average

Annual average rainfall mm 280 (6) 272 (3)

Total area operated, 30 June ha 5 081 (6) 3 992 (19)

Land use intensity (sheep equivalents) hd/ha 6.6 (8) 6.0 (3)

Total labour used wks 109 (9) 129 (9)

– sheep equiv. per labour unit dse/labour unit 14 829 (11) 8 959 (12)

Proportion of land sown to crops % 51.1 (8) 44.5 (2)

Total area sown to grain crops ha 2 589 (7) 1 766 (19)

– wheat % 86.2 (4) 71.3 (9)

– barley % 6.0 (27) 19 (34)

– oilseeds % 0.2 (82) 1.9 (67)

– pulses % 1.8 (58) 3.3 (52)

Grain production t 2 258 (27) 1 931 (23)

Number of sheep, 30 June no. 2 336 (16) 2 715 (12)

Sheep and lambs sold no. 1 372 (37) 800 (18)

– lambs sold no. 518 (18) 271 (26)

Number of beef cattle no. 1 (138) 0 (126)

Beef cattle sold no. na na Wool production kg 10 709 (15) 11 867 (13)

Yields Average grain yield t/ha 0.9 (25) 1.1 (17)

– wheat t/ha 0.9 (21) 1.2 (17)

– barley t/ha 1.0 (62) 1.0 (38)

– oilseeds t/ha 0.2 (0) 1.3 (26)

– pulses t/ha 0.2 (40) 0.5 (44)

Lambs marked per 100 ewes mated % 78.8 (3) 77.4 (7)

Wool clip per head shorn kg/hd 4.0 (9) 5.1 (6)

Prices received Average grain price $/t 302 (7) 328 (4)

– wheat $/t 282 (7) 349 (14)

– barley $/t 199 (12) 241 (27)

– oilseeds $/t 0 (0) 555 (1)

– pulses $/t 399 (0) 584 (0)

Adult sheep $/hd 56 (5) 53 (25)

Prime lambs $/hd 67 (14) 86 (4)

Wool c/kg 470 (9) 548 (5)

na Not applicable. Note: Figures in parentheses are relative standard errors (RSEs), which are standard errors expressed as a percentage of the estimate provided. A guide on how to use RSEs is in the survey methods and definitions section.

16


5 Financial performance benchmarks: Western Australian eastern zone, 2006–07 to 2008–09, by industry average per farm


average average

Farm cash receipts $/ha 142 (20) 189 (18)

Receipts from the main agricultural activities – crops $/ha 112.4 (27) 134.8 (20)

– beef cattle $/ha 0.0 (0) 0.0 (0)

– sheep and lambs $/ha 15.7 (31) 11.9 (17)

– wool $/ha 7.8 (19) 20.5 (40)

Water use efficiency $/100 mm/ha 51 (23) 66 (19)

Farm cash costs $/ha 114 (10) 162 (8)

– administration $/ha 4.1 (9) 6.5 (24)

– beef cattle purchases $/ha 0.0 (0) 0.0 (108)

– contracts $/ha 0.9 (38) 2.6 (52)

– crop and pasture chemicals $/ha 14.0 (13) 19.9 (15)

– fertilisers $/ha 21.3 (13) 34.2 (8)

– fodder $/ha 0.4 (88) 1.5 (61)

– freight $/ha 2.7 (52) 6.0 (56)

– fuel, oil and grease $/ha 10.0 (12) 13.6 (11)

– handling and marketing $/ha 5.3 (39) 4.6 (34)

– hired labour $/ha 2.9 (50) 7.0 (20)

– interest $/ha 18.4 (11) 14.0 (15)

– repairs and maintenance $/ha 7.7 (4) 16.4 (17)

– shearing and crutching $/ha 3.4 (15) 2.8 (24)

– sheep purchases $/ha 3.4 (60) 3.6 (45)

Farm financial performance Farm cash income $/ha 27.9 (113) 27.2 (107)

Farm business profit $/ha –7.7 (407) –8.4 (274)

Total cost to value of output ratio cents/$ of output 105.6 (23) 104.5 (13)

Total farm capital $/ha 910 (4) 981 (16)

Rate of return on capital at full equity – excluding capital appreciation % 1.4 (260) 1.1 (185)

– including capital appreciation % 0.9 (398) 1.1 (210)

Farm equity $/ha 697 (4) 806 (21)

Return on farm equity – excluding capital appreciation % –1.1 (407) –1.0 (289)

– including capital appreciation % –1.7 (254) –1.1 (298)


17


Survey methods and definitionsABARES has conducted surveys of selected Australian agricultural industries since the 1940s. These surveys provide a broad range of information on the economic performance of farm business units in the rural sector. This comprehensive set of information is widely used for research and analysis which forms the basis of many publications, briefing material and industry reports. The annual broadacre Australian agricultural and grazing industries survey (AAGIS) commenced in 1978–79.

Target populationsThe AAGIS is designed from a frame (population list) drawn from the Australian Business Register (ABR) and maintained by the Australian Bureau of Statistics. The ABR-based frame provided to ABARES consists of agricultural businesses registered with the Australian Taxation Office, together with their corresponding statistical local area, industry classification and a size of operation variable.

ABARES surveys target farming establishments that make a significant contribution to the total value of agricultural output (commercial farms). Farms excluded from the ABARES target population will be the smallest units, and in aggregate will contribute less than 2 per cent to the total value of agricultural production for the industries covered by the surveys.

Reliability of estimatesThe reliability of the estimates of population characteristics published by ABARES depends on the design of the sample and the accuracy of the collection of characteristics for the individual sample farms.

Sampling errorsOnly some of the farms in a particular industry are surveyed. The data collected from each sample farm are weighted to calculate population estimates. Estimates derived from these farms are likely to be different from those that would have been obtained if information had been collected from a census of all farms. Any such differences are called ‘sampling errors’.

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

To give a guide to the reliability of the survey estimates, standard errors are calculated for all estimates published by ABARES. These estimated errors are expressed as percentages of the survey estimates and termed ‘relative standard errors’ (RSEs).

18


Calculating confidence intervals using relative standard errorsRSEs can be used to calculate ‘confidence intervals’ that give an indication of how close the actual population value is likely to be to the survey estimate.

To obtain the standard error, multiply the relative standard error by the survey estimate and divide by 100. For example, if average total cash receipts are estimated to be $100 000 with a relative standard error of 6 per cent, the standard error for this estimate is $6000. This is one standard error. Two standard errors equal $12 000.

There is roughly a two in three chance that the ‘census value’ (the value that would have been obtained if all farms in the target population had been surveyed) is within one standard error of the survey estimate. This range of one standard error is described as the 66 per cent confidence interval. In this example, there is an approximately two in three chance that the census value is between $94 000 and $106 000 ($100 000 plus or minus $6000).

There is roughly a 19 in 20 chance that the census value is within two standard errors of the survey estimate (the 95 per cent confidence interval). In this example, there is an approximately 19 in 20 chance that the census value lies between $88 000 and $112 000 ($100 000 plus or minus $12 000).

Comparing estimatesWhen comparing estimates between two groups, it is important to recognise that some of the differences are subject to sampling error. As a rule of thumb, a conservative estimate of the standard error of the difference can be constructed by adding the squares of the estimated standard errors of the component estimates and taking the square root of the result. An example is given below.

Suppose the estimates of total cash receipts were $100 000 for the specialist grain producing sector and $125 000 for the mixed enterprise sector—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:

(6 x $100 000 / 100)2 + (6 x $125 000 / 100)2 = $9605

A 95 per cent confidence interval for the difference is:

$25 000 ± 1.96 x $9605 = ($6174, $43 826)

Hence, if a large number (towards infinity) of different samples is taken, in approximately 95 per cent of them, the difference between these two estimates will lie between $6174 and $43 826. Also, since zero is not in this confidence interval, it is possible to say that the difference between the estimates is statistically significantly different from zero at the 95 per cent confidence level.

19


Definitions of itemsTotal area Includes all land operated by the farm business, whether owned or rented operated by the business, but excludes land sharefarmed on another farm.

Owner manager The primary decision-maker for the farm business. This person is usually responsible for the day-to-day operation of the farm and may own or have a share in the farm business.

Labour Measured in work-weeks, as estimated by the owner manager or manager. It includes all work on the farm by the owner manager, partners, family, hired permanent and casual workers and sharefarmers but excludes work done by contractors.

Hired labour Excludes the farm business manager, partners and family labour, and work undertaken by contractors. Expenditure on contract services appears as a cash cost.

Capital The value of farm capital is the value of all the assets used on a farm, including the value of leased items but excluding machinery and equipment either hired or used by contractors. The value of ‘owned’ capital is the value of farm capital excluding the value of leased machinery and equipment.

ABARES uses the owner manager’s valuation of the farm property. The valuation includes the value of land and fixed improvements used by each farm business in the survey, excluding land sharefarmed off the sample farm. Residences on the farm are included in the valuations.

Livestock are valued at estimated market prices for the land use zones within each state. These values are based on recorded sales and purchases by sample farms.

Before 2001–02, ABARE maintained an inventory of plant and machinery for each sample farm. Individual items were valued at replacement cost, depreciated for age. Each year, the replacement cost was indexed to allow for changes in that cost.

Since 2001–02, total value of plant and machinery has been based on market valuations provided by the owner manager for broad categories of capital such as tractors, vehicles and irrigation plant.

Total cash Total of revenues received by the farm business during the financial year, receipts including revenues from the sale of livestock, livestock products and crops, plus the value of livestock transfers off a property. Total cash receipts include revenue received from agistment, royalties, rebates, refunds, plant hire, contracts, sharefarming, insurance claims and compensation, and

20


government assistance payments to the farm business.

Total cash costs Payments made by the farm business for materials and services and for permanent and casual hired labour (excluding owner manager, partner and other family labour). Total cash costs include the value of livestock transfers onto the property as well as any lease payments on capital, produce purchased for resale, rent, interest, livestock purchases and payments to sharefarmers. Capital and household expenditures are excluded from total cash costs.

Farm cash The difference between total cash receipts and total cash costs. income

Build-up in The closing value of all changes in the inventories of trading stocks during trading stocks the financial year. It includes the value of any change in herd or flock size or in stocks of wool, fruit and grain held on the farm.

Depreciation Estimated by the diminishing value method, based on the replacement cost of farm and age of each item. The rates applied are the standard rates allowed by improvements, the Commissioner of Taxation. Calculation of farm business profit does not plant and account for depreciation on items subject to a finance lease because cash equipment costs already include finance lease payments.

Imputed An estimate of the labour input of the owner manager, partners and their labour cost families is calculated in work-weeks and a value is imputed at the relevant Federal Pastoral Industry Award rates.

Farm business Farm cash income plus build-up in trading stocks, less depreciation and the profit imputed value of the owner manager, partner and family labour.

Profit at Farm business profit, plus rent, interest and finance lease payments, less full equity depreciation on leased items.

Rate of return Calculated by expressing profit at full equity as a percentage of total opening capital. Rate of return represents the ability of the business to generate a return to all capital used by the business, including that which is borrowed or leased.

Sheep A proxy of the total resources used by agriculture that converts all of the equivalents resources used to produce sheep, beef cattle, dairy cattle and crops into a single unit. It is calculated as:

Sheep equivalents = number of sheep + 12 x area sown to crops + 12 x number of dairy cattle + 8 x number of beef cattle

The higher the estimated sheep equivalents per hectare, the more intensively a farm’s resources are being used.

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