RISK is manageable, but uncertainty is what can have a significant impact on your farming business, according to The University of Melbourne associate professor Bill Malcolm.
Speaking at the Better Beef Conference in Bairnsdale last week, Mr Malcolm said we simply don’t know what the future holds.
“The future is coming, so it’s important that we think about it, and part of the big picture is not only thinking about risk, but also uncertainty,” Mr Malcolm said.
“We can get a handle on risk, but uncertainty is another story, there’s no way to predict it, and I think that’s what makes farming such a tough job.”
He said this is just the environment in which people have to run farms.
“You can get all sorts of predictions, but opinions are free and facts are sacred,” he said.
“Market predictions and things like that are the best sorts of information you can get, but you can’t guarantee any of it because of this thing called uncertainty, and that is those really rare events that are likely to have a huge impact.”
So how exactly can farmers run effective businesses given these uncertainties?
Mr Malcolm has a few suggestions.
“The best farmers I know are the ones that build all of their wealth during the bad times, and strengthen their balance sheets in order to build up equity,” he said.
“Some farmers will have a few tough years, and then when things are beginning to look up, they’ll go out and buy a new ute, or a new tractor, and I get that you need to rebuild and replenish, but you’ve got to focus on your equity.”
He also said that it is important not to put “all of your eggs in one basket”.
“Your most valuable investment is usually on the farm, you’ve got the land and the machinery, and you’re putting the labour in, but it’s important to get some assets off the farm, and out of the beef industry,” he said.
“You shouldn’t have all of your assets correlating, if you do, it means if one is good, the other is good, but if one is bad, it means the other is bad too.
“Try and make it so your assets don’t go up and down at the same time.”
He said while risk creates return, it’s important to spread out that risk.
“Risk creates return, so if there’s no risk there’s no return,” he said.
“But you can combine your assets in such a way that if they’re not correlated, you can increase return without increasing risk to the same extent.”
Being good at what you do is another important tool to managing risk.
While he said it’s important to spread risk and invest in other, non-related industries, he said there’s no better guarantee than confidence in your abilities and business.
“Specialising and being good at what you do is one of the best ways to manage your risk on your farm,” he said.
“The best farmers I know, the first thing I notice is that they’re really good at their jobs, and then secondly that they have a mix of commodities and get their balance sheets right.
“And your best investment is improving your farm.”
So how do you judge the fitness of your business?
Mr Malcolm said there are three things to analyse – efficiency, liquidity and wealth.
“People tend to focus heavily on the technical measures of your business, like wool cut per hectare or weight turn-off per hectare, and that’s all important, but it tells you nothing about how fit your business is,” he said.
“The only ways to tell how fit your business is is by judging whether or not you’re getting a decent return on capital, whether you’re able to generate enough cash to service all of your debts, and whether you’re growing your wealth.”
He said while it’s important to learn from past decisions, it’s more efficient to look into the future.
“Farm management and economics to me is all about looking ahead, learning from what you’ve done and where you started, and then looking ahead,” he said.
He said planning is important, but shouldn’t be completely relied upon.
“Planning is useless because of uncertainty, this is why farming is so hard, and why I think a lot of farmers don’t get return on capital, purely because of uncertainty,” he said.
“That’s why some farmers do better than their neighbours, because they manage their risk and uncertainty as best they can.
“You can farm badly for a long time before you go broke, so it’s best to get ahead of it.”
