Rookie errors on the road to an agricultural boom

The growing media excitement about the future potential of Australian agriculture as the next ‘boom’ sector of the economy has triggered a slew of analyses discussing how the sector can take advantage of the opportunities. In their new-found agrarian enthusiasm, some of the commentators are perhaps less than familiar with the agriculture sector, and not aware of the dangers inherent in taking some of the sectors’ official statistics at face value.

Prominent amongst the rookie errors evident in some of the analysis has been a reliance on ‘average’ farm profitability data to gauge the financial health of farm businesses, and a focus on the apparent ‘ageing’ of farmers as evidence of weakness in the ability of the sector to rise to the opportunities that are emerging.

Dealing first with farm profitability data, a recent article by Julie-Anne Sprague (Australian Financial Review, 22/10/2012), quoting some analysis by Port Jackson Partners, noted that:

[F]arm performance has been deteriorating – since the 1990s more than a quarter of broadacre farms made a loss every year, and half achieved an average cash income of $43,000. This makes expanding production a challenge for Australia…

The problem with the use of this data, as experienced agricultural analysts are well aware, lies in the definition of a farm business in Australian agricultural statistics. Farm businesses are included in the ABARES broadacre survey if they have an estimated value of agricultural output (EVAO) above a specific threshold. Between 1987–88 and 1991–92 the survey included establishments with an EVAO of $20,000 or more. Between 1991–92 and 2003–04 the survey included establishments with an EVAO of $22,500 or more. Since 2004–05 ABARES farm surveys included establishments classified as having an EVAO of $40,000 or more. This means that many of the ‘farms’ included in the analysis are not commercial farms, but lifestyle farms.

To give some indication, approximately 30% of the farm businesses included in the survey have an EVAO of less than $100,000, but these account for only approximately 5% of total agricultural output, and obtain more than 90% of their net income from off-farm wages. These farms are managed at the weekend and owned for lifestyle reasons, and are located in the hinterlands of many Australian capital and regional cities.

Including these small farms in an industry-wide analysis is a bit like calculating the average earnings of Australia’s professional golfers by totalling their earnings, then dividing that number by the total number of people in Australia (professionals and weekend amateurs) who play golf.

The 20% of Australian broadacre farm businesses that have EVAOs in excess of $400,000 per annum account for more than 70% of total annual output, and have experienced average annual investment returns over the past two decades that most superannuation fund managers can only dream about.

The article also noted that ‘… ageing farmers (average age is 53, up from 44 in 1981) has left the sector in a weaker position to manage poor weather and the rising Australian dollar.’

The first, often overlooked factor in relation to this statistic is that fact that the entire Australian population is ageing, as families have less children. In fact, over the period from 1981 to 2012, the median age of the entire population has increased by almost 5.5 years, so the apparent ageing of farmers needs to be considered in the light of trends in the entire population.

Secondly, over the period from 1990 to 2011, the average capital value of Australian farms has more than doubled in real (inflation adjusted) terms, from around $1.78 million to $3.92 million. Given this (a consequence of farms getting bigger and more efficient) it should not be any great surprise that younger farmers are less likely to be able to enter farming at an early age, given the amount of capital that is now required.

A third point to note in relation to apparent average age of farmers is that there are a significant proportion (16%) of farmers who are above retirement age and who may no longer be actively involved in farm operations, but who are still classified as farmers due to their ownership of at least some of the farm assets. The presence of this group in the statistics is likely to bias the average age upwards.

These are just two examples of the limitations of some well-meaning, but less than robust analyses of the sector that have appeared over recent times. The newfound interest in Australian agriculture by the media is certainly a welcome change, but those less than familiar with the sector need to exercise some care in the prescriptions they conclude are needed by the sector to reach its full potential.

Keep up-to-date with discussions of current issues in Australian and international agriculture policy by visiting the Australian Farm Institute’s blog and chat room ‘Ag Forum’.

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