Productivity, people and profit drive successful farm businesses

The double edged sword of soaring land prices

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HIGH PERFORMERS: Before making substantial farm investments, it is advisable to undertake a thorough and honest review of likely business productivity, people and profit.

HIGH PERFORMERS: Before making substantial farm investments, it is advisable to undertake a thorough and honest review of likely business productivity, people and profit.

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COMMENT: Sustainable assets and business growth is driven by productivity, people and profit.

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The price of land is a great Australian topic of conversation, and there has been plenty to talk about in the past 18 months.

Some questions abound, including whether: current trends will continue; interest rates will remain low; businesses will be at risk if there is an upward shift in rates; land prices will be sustained; prices will fall if there is a run of bad years; and if businesses can make a return at these prices.

According to my late uncle Basil, these questions are not new.

Uncle Basil loved telling me about local commentary in northern Victoria about who paid too much for what in the 1940s, 1950s, 1980s and the 2000s.

An astute risk-taker and land accumulator over the decades, Basil recalled hearing second-hand about other people's opinions that he'd paid too much for properties on more than one occasion.

Despite some ebbs-and-flows across the years, the conclusion he made after 90 years of observing land prices was that money falls out of your pocket more quickly than it falls out of land.

That was 100-year-old Basil's way of encouraging investment in appreciating - rather than depreciating - assets if one is in farming for the long haul.

Creating wealth or adding risk?

Building wealth by pursuing growth is indeed rewarding, albeit somewhat stressful and complex.

The rapid growth in agricultural land values feels like a double-edged sword.

On the balance sheet and wealth creation side, higher land prices increase net worth and borrowing power to access capital for further growth.

On the other side of the sword, the prospect of servicing an eye-watering debt, or making the new gold-plated land parcel "pay for itself", creates substantive doubt in the minds of would-be land purchasers.

The process of expansion is not as simple as looking solely at a cost benefit analysis, or deciding a path of action based on the last property sale in the district.

The purchase of a land parcel at a certain price can make economic sense for one business but not for another due to the unique characteristics of each farm.

There are also intangible factors that can't be described by numbers.

Profit fundamentals transcend time and land prices

PROFOUND: Kate Burke says the process of expansion is not as simple as looking solely at a cost benefit analysis, or deciding a path of action based on the last property sale in the district.

PROFOUND: Kate Burke says the process of expansion is not as simple as looking solely at a cost benefit analysis, or deciding a path of action based on the last property sale in the district.

To get a better sense of the tangible and intangible benefits a new block could offer, it helps to understand the profit-generating business fundamentals that transcend time and trends in land prices.

An extensive review of literature while writing "Crops People Money and You, the Art of Excellent Farming and Better Returns " led to the conclusion that, in any era, profit is driven by optimising productivity cost-effectively over the whole of the farm and the life of the farming business.

Productivity drives cashflow and profit.

In dryland farming systems, this is underpinned by water availability and water use efficiency.

These are determined each year by the seasonal productive capacity of the farm, which is a function of the farm location(s) and associated climate, landscape, soils and the rainfall available each season.

Other factors include the human and economic systems at play, which can directly or indirectly affect farm productivity in the year of production and in following years.

It is complex and connected, and the human element is important - which is where the intangibles come into play.

In other words, I found the highly profitable businesses focused on the fundamentals.

These were productive, profit-focused and run by passionate and effective people.

Those fundamentals are simply maintaining focus on: crops (and other things) - by being highly productive; money - by being profit-focused and knowing the business; and people - by being passionate, motivated and effective.

When it comes to crops (and livestock), business returns were driven by productivity per unit of rainfall - not by price.

Timely operations and agronomy were critical.

Most variation in financial performance could be explained by grain yield, cost management and efficient use of resources.

Farm-scale and commodity price were poor explainers, and yield was one of the soundest.

In droughts, this means trying not to lose too much, and in bumper years it means cost-effectively producing as much of the potential on offer that is possible.

When it comes to money, the most important mechanism for reducing business risk is a low-cost business model.

This does not mean spending less on inputs. Successful farmers typically spend slightly more than average.

Think of it simply as understanding and managing fixed costs.

Having fixed costs appropriate to business size and the likely volatility of income given their geographic location, minimises the risk of failure.

My research showed strong businesses were owned and operated by people who displayed a balance of technical, financial and emotional intelligence.

Being good with people meant being good with yourself and others.

It meant taking responsibility for the crops and money components of the business and dealing with long-term issues, such as succession.

So, what do business fundamentals have to do with the double edged sword of increasing land prices?

The most valuable due diligence activity prior to any substantial investment is a thorough and honest review of productivity, people and profit.

High performance in each of these areas will improve the odds of sustainable business growth in the face of rising land prices.

- Dr Kate Burke is an agri strategist, educator and speaker and has written "Crops People Money and You the Art of Excellent Farming" and "Better Returns".

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