2013, Volume 10, Paper 5

Profit, cash, wealth and risk implications of changes to a prime lamb business in south-west Victoria

Jonathon Tocker – Agriculture Research Division, Department of Environment and Primary Industries, Hamilton, Vic, Australia and Red Meat Innovation Centre, Department of Environment and Primary Industries, Hamilton, Vic, Australia.

B. Malcolm – Red Meat Innovation Centre, Department of Environment and Primary Industries, Hamilton, Vic, Australia and Agriculture Research Division, Department of Environment and Primary Industries, Parkville, Vic, Australia.

J. Heard – Agriculture Research Division, Department of Environment and Primary Industries, Hamilton, Vic, Australia and Red Meat Innovation Centre, Department of Environment and Primary Industries, Hamilton, Vic, Australia.

A. Sinnett – Agriculture Research Division, Department of Environment and Primary Industries, Parkville, Vic, Australia.

C. Ho – Agriculture Research Division, Department of Environment and Primary Industries, Parkville, Vic, Australia.

R. Behrendt – Agriculture Research Division, Department of Environment and Primary Industries, Hamilton, Vic, Australia and Red Meat Innovation Centre, Department of Environment and Primary Industries, Hamilton, Vic, Australia.

Email: jonathon.tocker@depi.vic.gov.au

Summary

Over the next decade sheep farmers will experience rising real costs for key inputs, while real prices received for meat and wool are unlikely to rise on a sustained basis, meaning annual profit and debt servicing capacity will continue to be squeezed. Under these conditions continuing with business as usual will result in declining annual net incomes, reduced net cash flows and eroding of current wealth. Variability in seasonal conditions and changing farm family goals also add to the pressures faced by farm businesses. A case study of a prime lamb operation in south-west Victoria was analysed to inform the farm owner, and others in similar situations, about the relative merit of common choices for the challenges they face. The focus was on changes to the farm business that would increase profits from producing prime lamb, evaluating both the profit and the risk of making these changes. The biophysical, economic, financial and risk dimensions of the farm business were simulated to examine how changed farm systems were likely to perform under volatile seasonal, price and cost conditions over a seven year planning period. Each change was also analysed to estimate additions to wealth, debt servicing and the attractiveness of these options based on the degree of aversion to risk.

Four changes to the base farm were analysed: increasing stocking rate; increasing land area; increasing stocking rate and land area; and increasing lambing percentage. The changes increasing stocking rate and lifting lambing percentage involved less capital investment and used the extra capital invested the most efficiently of all of the changes. They offered attractive additions to wealth and had less total risk than the changes that involved borrowing to purchase and develop land. These two changes would be more attractive to decision-makers with a low to medium aversion to taking risk. Purchasing extra land, but not increasing its productivity had significant extra financial risk associated with servicing extra debt, and if there was no real capital gain, this would give the lowest addition to wealth over the seven years. Purchasing extra land and increasing the stocking rate on both the new and base farm area offered the greatest addition to end wealth for similar levels of business and financial risk as only purchasing extra land. This option would appeal to decision-makers in a position to take on a marked degree of additional risk and provide the opportunity to build considerable extra wealth. These results suggest the expansion in size of prime lamb businesses will be limited by the degree to which capital gain can be made on purchased land and the significant additional financial risk associated with the servicing of debt. Furthermore, analysis of factors contributing to variability of returns on capital indicated price of lamb was a substantial contributor to risk of the enterprise, suggesting sheep farmers and industry should seek solutions to mitigate this risk to their businesses.

Keywords: farm change, whole farm analysis, economics, finance, wealth, risk