Agribusiness: Investing in a prosperous new normal

As most Australian businesses face new challenges arising out of COVID-19, agribusinesses face some new opportunities.

With a need to invest, and with other sectors of the economy such as retail and hospitality working against even greater headwinds, banks are reassessing agribusinesses as preferred candidates for finance.

Creditors, who had previously seen agribusiness as an industry both too risky and too difficult to forecast returns on, are instead funding operators on extremely favourable conditions with agricultural loan approvals increasing by 46.5 per cent year on year.

Historically low interest rates not only make this a suitable time for business operators to refinance and cut their costs, but also to embark on much needed investment to strengthen their business.

What does the future of your farm look like?

As an agribusiness operator, the strength of your business depends on your ability to control variables. Farmers are at risk from weather events (such as drought, hail, and fires), as well as from economic risks (such as supply shock and disruptions in currency markets). At this time, when banks are more willing to offer finance to farms at favourable terms, operators should consider making the investments that will help them take more control of their risks.

The question then is how? In my capacity as both an advisor and a former agricultural business operator, I see three potential avenues for investment worth pursuing: new acquisitions, land development, and technological innovation. Each of these offers different mechanisms for operators to control risks, helping them avoid or minimise economic loss.

1. New acquisitions

For many operators, the answer for where to invest is as simple as the old saying: ‘buy land…they aren’t making any more of it’.

This tactic has historically made sense as a creation of wealth from rising land prices. Although, at the time of writing this article, high property price rises have perhaps tempered the short and medium term prospects of such gains. The principle here, however, is not capital gains but reduced and diversified business risks to stabilise returns, provided it is approached in the right way.

Australians are blessed with an enormous country, rich in arable land spread across a great number of environs and climates. As a result, operators with the capital to finance new acquisitions can reduce their risk by geographically diversifying. Purchasing land in a different state or territory, with a higher rainfall or other balancing effect from your current farm operations, can reduce your risk by limiting the exposure of your entire operation to a single drought or weather event. It also offers the ability to build resistance against economic shocks, allowing you to take advantage of different climates to grow different products for different markets, so, in the event of a new barley tariff in China affecting your Western Victorian business, you are still able to earn a comfortable margin growing prime lambs or beef two hours west at your pastoral in the South East of South Australia.

Purchasing land closer to home can also help strengthen your business as often operators can grow their acreage – and their output – without attracting new machinery costs. Tractor sales data shows that Australian farmers are buying more powerful machines than ever before and in greater numbers, meaning that many operators are likely not working their machines to their full capacity. With many Australians sitting on the ability to work potentially much larger areas, buying out the neighbours can unlock additional efficiencies hiding within your business. This can help you build up a stronger war chest in better years to help lessen the need to borrow during periods of drought or economic downturn.

For those that have not yet upgraded machinery, the current low interest rate climate and recent government incentives, such as the hugely expanded instant asset write-offs, mean large machinery purchases to gain on farm capability are both affordable with minimal interest, low repayments and large tax benefits. A good season with strong livestock prices can further offset the cash flow burden of the acquisition.

2. Developing your existing land

They say charity starts at home, and the same is often true of agribusiness investment. Just as you may not be realising the full value of your existing machinery, it is possible that you are not realising the full value of your existing land. By optimising your use of your land, you can grow your operation without growing your acreage.

Close examination of your property can reveal opportunities to build resilience, further reducing the impact of outside variables on your productivity and helping you better take control of your inputs. There is something in the old adage about farmers owing their existence to ‘a six inch layer of topsoil and the fact it rains’. The biggest immediate risks to our profitability are our access to water, healthy soil and pasture. Investing in measures to protect this access can help ensure your farm’s overall profitability, helping to limit the potential economic impact of a drought, bout of disease, or other event.

What land improvement looks like will be different for every operator and every property, but could broadly include installing bore holes to access subterranean water, or spreading animals more evenly across pastoral property to improve the longevity of pastures. It could also mean undertaking land management initiatives to protect native grasses during dry periods, reducing the need to purchase additional feed for livestock, and improving the ability of the soil to retain moisture when rain arrives. Broadacre farmers need to continue to pay attention to the quality of their soil, looking for opportunities to increase soil health and fertility during periods of rainfall to reduce drought effects. Tailoring crop rotation to prioritise soil health, retaining crop residue and planting cover crops, can help to protect soil now and into the future. Better guidance and soil monitoring technology can also reduce input costs by ensuring fertilisers, sprays are only used where and if needed. The simple question to be asking yourself is: what can I do to continue to improve my farm operations and control what variables I can?

3. Technological innovation

In addition to investing in your land, operators should also consider how investment in their processes and equipment could help them build resilience.

As climate change makes weather patterns less predictable and natural disasters, such as bushfires, more destructive, maximising productivity within a changeable growing season is becoming increasingly important for operators. Recent advances in technology offer new mechanisms for farmers to control variables and decrease their dependencies, delivering more consistent results in varying environmental and economic conditions. I encourage all farmers to look to the more intensive agricultural sectors, such as mushroom and chicken farming, for ideas on variable control, as these sectors have been able to develop technology to remove most (if not all) of the environmental elements, pouring capital into systems to control temperature, humidity, carbon levels, nutrient levels and more. Other agricultural producers have been unable to replicate these controls and are often more vulnerable to the types of sudden weather events that can destroy millions of dollars in produce.

Many farmers are also looking inwards for resilience solutions. Some are turning to breeding (both natural and genetic modification) to produce more resilient crops and livestock. Individual operators are putting significant investment into the creation of higher-yield and more drought-resistant plant varieties and livestock breeds, while also financing breeding of disease-resistant livestock species and bloodlines. For many farmers, such investments can offer significant returns. While the upfront costs can be high, a well-chosen crop or bloodline that’s compatible with your land and climate can reduce the need for complex direct intervention to shield crops and livestock from heat and other environmental factors. Smart investments can also lower your operating costs and produce higher yields.

However, it is important to understand that the strong results delivered by these techniques are underpinned by deep knowledge of your land. These are tailored solutions – to shape them, farmers need to be able to draw timely insights from data around crop and animal performance, as well as economic data about the profitability of certain activities and products. With knowing your numbers being such a crucial step towards optimising your organisation, it’s vital that any operator looking to make their business more resilient must first invest in the technology that helps them understand key metrics. Among others, current accounting software with budget to actual reporting, paddock by paddock or crop by crop performance analysis, combined with farm monitoring equipment, can help guide your decision-making, revealing the shortcomings in your operation that more intensive technology could address.

Make the informed choice for your business

With opportunity at hand and some uncertain economic times ahead, farm operators would do well to capitalise on this moment and bend it to their advantage. Talk to your local Bentleys advisor for assistance with future-proofing your agribusiness.

 

We, at Bentleys, are doing everything we can to help businesses come out of this challenging time in good shape.

We will continue to update our COVID-19 resource hub with important developments, so please return soon.

Disclaimer: This information is general in nature and should not be relied on as advice. It does not take into account the objectives, financial situation or needs of any particular person. You need to consider your financial situation and needs and seek professional advice before making any decisions based on this information.

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