Aussie farming: The big gamble or the safe bet? An insight into the risks farmers take to grow our food
03 December 2024
Jonathan WeinstockCrypto, startups, blackjack or farming.
Which one would Warren Buffett choose?
Fair to say that the world will still need to eat in 10, 20 and 1000+ years time.
Ask a farmer about the value of their land and they will say “well they ain’t going to make any more of it are they?” That’s actually a wise economic analysis. Arable farmland is scarce in supply and food and famine are major national and global security risks.
Interestingly, what the world eats (carbs, proteins, fats via breads, cereals, pasta, meats, dairy, fruit and vegetables) and what clothes people wear (cotton, wool) fundamentally hasn’t changed over thousands of years. The global demand for food and fibre will forever exist as we know it. Even the monkey on the Coco Pops breakfast cereal box hasn’t changed since 1958.
The data clearly demonstrates that Australian agricultural real estate shows strong and consistent long term growth and arguably stronger than the other real estate sectors in Australia. However, for farmers to make a buck each year to justify staying on the land, and for us ‘eaters’ to have affordable food to consume, farmers need to grow productively, consistently and sustainably at a profit. This is where the farm gamble lies.
Below is an overview of the major key risks that Aussie farmers encounter and how they navigate through some of these.
Climate risk: When we ask a farmer for a financial forecast, the typical response is, “tell me when it’s going to rain and I’ll give you a forecast!” Climate risk presents the major unpredictability of farming. Over time, there’s good years, bad years, horrible years and great years. There’s memorable seasons and forgettable ones, but good farmers have successfully survived and thrived over the test of time and production output and farm gate value continues to grow in Australia towards our $100B target.
Luckily the fruit and veggie markets in Melbourne don’t rely on my supply. The strong winds in Melbourne blew over my tomato plant last week and it snapped. Harvest over. Fair to say that my skills are probably better suited to agricultural private credit and cricket rather than farming (for now).
Crops need water from the heavens or from an irrigated supply via the local water systems (dams, rivers, lakes) at the right time, in the right quantity and at the right price. Crops also need temperatures and humidity to be within range at the right times. Crops can be fickle and whether you pay two or three times more for your bread, avocados and mangoes depends on it!
Farmers can adapt to weather patterns to a degree, but climate change, droughts and floods are part and parcel of farming. Farming is typically generational so it’s not often a family shuts up shop after three generations and moves to another climatic or farming region. Human nature and farming are aligned – many farmers are ‘glued’ to their land at the expense of possible brighter opportunities elsewhere. Weaker production due to challenging seasonal conditions can be offset by increased commodity prices and likewise, a weaker northern hemisphere season can benefit Aussie farmers.
Farmers can also mitigate climatic risk through protected cropping practices which enable controlled environments for farming although this is typically for horticulture and requires significant capital investment in infrastructure. Taking out most of the growing risk does sound appealing with more predictable and consistent yields and quality. In fact, this is a strategy of some of our larger agricultural assets fund managers in Australia.
Proactive measures can also assist with drought preparedness – measuring and monitoring weather, soil, rotations, water storage, grain storage and other efficiencies are a worthwhile investment and help prepare and mitigate through challenging periods. The Federal and State governments have financial initiatives, grants and concessional loans to help improve the strength and resilience of farm businesses. We have worked closely with the Regional Investment Corporation, the NSW Rural Authority and QRIDA on a number of transactions who have provided significant support to Aussie farmers.
Pricing risk: Farmers are most often price takers yet have to incur the rising costs of farming. They at the whim of demand from domestic and global markets while exposed to geopolitical risk, global tariffs and government subsidies abroad.
A range of variables impact price on both the demand and supply side which include the major supermarket buy prices, the competition for product internationally, the impact of growing seasons abroad, trade tariffs and the strength of global currencies impacting the attractiveness of international trade.
These variables and further compounded by government interventions and subsidies, supply chain and logistics costs, farmer input costs, labour costs, finance costs, inflation, cost of living and consumer demand.
All most people want is simply a cheaper basket of groceries at the checkout while ensuring a fair price for farmers. To understand commodity pricing we typically reference long term averages and deciles – which provide an indication of today’s price versus historic averages.
Substitute foods also provide a risk mitigant on demand and price. Theres only so much consumers are prepared to pay for staples and luxury items with suitable alternatives often available.
Growing risk: The art versus science of growing a crop. Is it grandad’s way or the young farmer, fresh out of ag school with the latest ag tech tools? Soil science and technology continue to evolve but there’s definitely an art to growing a crop based on experience and production history. Peeking over the neighbours fence is a common benchmark given the similar soils and climatic conditions although it may rain on one side of the road and not rain on the other side! A quick drive through a region can provide a guide and farmers can be known to over inflate crop performance at the local pub from time to time. We do hold a deep appreciation for the skill required to grow vast amounts of produce consistently.
Climate and price risk on farm profitability (ABARES insights) As can be seen by the ABARES data below, the combination of both climate risk and price risk impacts the variability of farm profitability significantly. This can work favourably for farmers with amplified profits as demonstrated recently with three recent consecutive years in Australia with broad acre farms experiencing both a favourable climate and pricing – a rare feat.
Climate risk impacts broadacre farming more than livestock, but the combination of risks is felt more for livestock farming. Price volatility which we have seen in livestock markets can mean far greater profits but also far greater losses for livestock. Which farm business would you choose? Many farmers mitigate risk by running livestock operations (sheep and cattle) in conjunction with cropping operations.
In summary
While farming is a stable and viable long term and viable asset class, there is variability in farm profits year on year. Fair to say that farmers are the ultimate optimists and wouldn’t change it for the world. They often dislike going to the big smoke and enjoy life on the land despite its challenges.
The variability in cash flows is often what creates short and medium term funding gaps for Aussie farmers. FarmCap are well equipped to provide non-bank funding to plug these gaps and guide farmers through their seasonality and business challenges. By having a deep understanding and appreciation, FarmCap are able to assist in a supportive, timely and flexible manner to ensure our farmers can keep food on our tables.
So, I guess farmers and Warren buffet do have something in common – they prefer farming over bitcoin, startups and blackjack. They’d both rather gamble on a crop each year.
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03 Dec 2024Share this post
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3rd December, 2024