Why Agriculture? Farmer Bestwool Group Seymour, G Daniel

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WHY AGRICULTURE?
Presentation to Farmer Bestwool Group, Seymour
Geoff Daniel
November 2013
FARMING PHILOSOPHY
For whatever reasons we farm, and I am sure these reasons are as numerous as there are farmers, it seems
clear to me that we must farm profitably. Besides the obvious reasons to do with provision of the essentials
for our families– food, clothing warmth, education – it seems to me that we owe it to future generations to
farm profitably now.
If we cannot farm profitably we will not be an attractive destination for capital, and it will leave (and has left)
our industry. Good examples of the effects of the inability to farm profitably and competitively include the
overrunning of our landscapes with the radiata and the blue-gum weeds. The less obvious but more insidious
effect is the widespread running down of infrastructure, pastures, and skills that we have seen in the grazing
industries over the past 20 or so years.
Agriculture is not sustainable without outside input - energy, replacement nutrients, new technology,
research and development, education or whatever must be purchased. To think otherwise, as the crazier end
of the green movement, and some rather naive farmers seem to do, is simply dumb. If we are to sustain our
businesses and our industry we must have profits, from which we can draw funds to reinvest and to reward
the providers of capital that have made that profitability possible. We must be attractive as a destination for
capital. We must be profitable.
So, I say; forget the touchy feely guff about sustainability peddled by the diverse range of prophets out
there. We must farm profitably and in a way that produces risk and return competitive with other industries.
Without this simple prerequisite, capital will flee from us and our industries will not survive.
And what does this mean?
It means that farm businesses must be continually assessing and integrating new technologies into their
production systems.
It means that managers and their advisors need the skills to adopt an evidence and systems based approach
when making decisions.
It means that we must continually strive to be producing whatever commodity we are involved in at an
acceptable quality and the lowest possible cost.
It means that we must not block the flow of capital needed to be invested in our industry for the gains to be
made that will ensure our survival.
CURRENT TRENDS
On the farm
I spend a lot of time driving around the bush, and quite frankly, it can get depressing.
I see too many old farmers, farmers that have given up, farmers that don’t have the skills to utilise their
resources.
I see too many young farmers that have not been able to throw off the bad habits of their fathers and
grandfathers.
I see a huge gap in performance between farmers that are similar in terms of scale, age, location etc.
I see too many farms that are too small to be viable, or so run down and burdened by debt that they have no
chance of becoming viable businesses under their current ownership and/or management.
I see desperate farmers using range of silver bullets from a range of providers across the full spectrum from
the just plain incompetent through to complete shonks. We have run our skills base down to a level that a
substantial proportion of farm managers do not have the skills to differentiate between useful and just plain
bad advice or products.
Running parallel to this I see very attractive returns being generated from the adoption of best practice
techniques on farms, and I see farming businesses run by well-educated and committed farmers that are
producing returns competitive with other asset classes.
How can this gap be bridged? My view is that there is a clear need for a massive change in the ownership
and management structure of the industry.
Growth Farms
Why Agriculture? November 2013
2
Off the farm
I also spend time in the city, and there I see real interest in agriculture from a business point of view.
Agriculture is finally on the radar of the managers and owners of large lumps of money. We are becoming
recognised as an asset class, and as a viable destination for capital. This is a major change in attitude in the
investment community.
This change in attitude is being driven by:
 A growing acceptance within the investment community that the there is substance in the argument
that growth in previously third world countries such as China and India will lead to a massive
demand for agricultural produce.
 Increasing concerns in many wealthy countries, particularly in Asia and the Middle East, that both
food security and food quality are major issues.
 A general acceptance that the debt fuelled super returns of the previous decade were not and are
not sustainable. There is a preference for real assets, producing a product of fundamental value to
consumers, who after all, in the long run, drive the economy.
There is a belief that the long term trend of falling prices for agricultural commodities has reversed, and
managers of capital are increasingly prepared to back this judgement with investment dollars.
I am not sure if I agree with them about price trends - I have always considered the long term downward
trend in commodity prices to be one of the great certainties of life. However perhaps there is something in
it. Certainly both lamb and grain prices have maintained their real value for the last 20 or 30 years. Maybe
Malthus was right after all. Quite frankly though, I don’t think that it matters much whether real prices are
going to rise or not – the fact is that if we strategically focus on producing at low cost we can have a good
business and a profitable industry.
So, amongst the doom and gloom I see opportunity.
GROWTH FARMS
I have been farming on my own account since 1984. For the first 15 years of this period I concentrated
exclusively on increasing the productivity and profitability of our family business. The financial results from
this were satisfactory, and it became increasingly clear that there was an opportunity to implement a similar
farming philosophy on a much larger scale than was possible locally.
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To this end, with some likeminded partners, we formed Growth Farms a business that provides professional
farm management services to the rural industry. The key characteristics of this business are:
 We are Farm Managers
 Assessment, acquisition, implementation and reporting are our core skills
 Professionalising management
 Evidence based – science is crucial to us
 Productivity gain is central to our strategy
 Remuneration is based on profitability
Currently businesses controlled by myself, my family and my various partners and Growth Farms control well
over $400M worth of agricultural land, plant and livestock spread over the higher rainfall areas of eastern
Australia, with an annual turnover of around well over $50M.
THE LOCAL SCENE
Tumbarumba shire contains 136,000 hectares of farming land. Of this, 124,682 hectares is used for the
grazing of beef cattle, wool or meat sheep.
These farms consist of an estimated 263 businesses, with an average grazed area of 474 hectares running
about 4,000 dry sheep equivalents (DSEs), stocked at a rate of 8.6 DSE per hectare.
The gross income from these farms during 2010-2011 was $33.6m or $128,000 per business, or $31.40 per
DSE.
Grazing farms are clearly a very important source of income to the shire.
Figures taken from my own businesses and from reputably benchmarked farms would indicate that a gross
income of $40-50 per DSE was achievable during that year. My businesses, covering 10,000 hectares, and I
would think being reasonably representative of the land in the shire, carry an average of 15-16 DSE per
hectare.
Some quick sums indicate that there is the potential to increase the agricultural income coming into the shire
by $40-50M, or well over double the current income. Imagine if this could be realised!
This is not an issue unique to Tumbarumba shire. If similar figures were calculate for any number of shires
the figures would be similar.
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Why is this? I think that it is simple:
 Farms are too small
 Farm managers are too old, undereducated or undercapitalised.
And what is the solution? Farms need to be aggregated, infrastructure and pastures need to be recapitalised
and management skills need to be reinvigorated.
THE FUTURE
Unlike the past, which is often a very is a pleasant place to be, the future is an unknown country – a very
scary place indeed. I hesitate to predict anything, however I think that there are some prerequisites that if
put in place, will give us the best chance of re-creating profitable farm businesses and a vibrant agricultural
sector.
We need smart well educated people to manage farm enterprises. To attract them to the industry they will
require career paths and reasonable remuneration.
We need high level, post graduate training in evidence based approach for these people and for all of the
support people that are part of a healthy industry; scientists, advisors, agribusiness executives etc.
We need the capital to be invested in farming businesses to allow the increases in productivity that are
possible. This capital can be in the form of either debt or equity. Well designed and implemented farm
productivity improvement programs can have returns much higher than the costs of the capital required to
enable them. My experience is that returns from these programs can range from 20% to 100s of percent.
However, there is risk involved and it is unlikely that debt can provide all of the capital needed by the
industry. We need new sources of equity to enter the industry.
And we need scale in farm businesses. Greater scale means that we can spread management over more
productive units, pay managers more appropriately, and provide real career paths for bright, well educated,
ambitious young people. We are currently going through a period of re-aggregation of farm businesses. This
process is overdue and must be allowed to run its course. Barriers to the growth of farm businesses such as
interest subsidies need to be removed so as to allow the “creative destruction” of the market place to do its
work.
Currently there is much hysteria regarding foreign ownership of farming businesses. If this hysteria has the
effect of slowing or stopping the re-aggregation and recapitalisation needed by farming businesses it will be
a disaster for Australian agriculture and rural communities in general. There is plenty of evidence that
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foreign investment has underpinned the Australian economy for the past 235 years, and there is little
rational reason to believe that threats from its utilisation are greater than the threats from its rejection.
My own family used the wealth gained from the sugar trade in the West Indies to finance the
industrialisation of cotton spinning and weaving industries in Scotland, and in turn sent this capital to
Australia where it was used to help develop the grazing industries of Western Victoria and Queensland.
Where would Australia be without this influx of British capital? The rise of Asia would seem inevitable and it
is our choice whether we adapt and interact on equal terms, utilising their capital to mutual benefit, or if we
follow a different path.
WHAT CAN GOVERNMENT DO?
I would say in a day to day sense; not much, and as little as possible. “Get out of the way” may be a realistic
request. In the medium to longer term there are real structural impediments to change that government
does have the power to influence.
These would include:
 Removal of impediments to the re-aggregation and re-capitalisation of Australian farm businesses.
Areas to consider:
 The effect of subdivision rules
 Interest subsidies
 Fodder subsidies
 Other RAS benefits
 Provision of advisory services and compulsory disease control programs
 Restriction of foreign investment
Provision of infrastructure
 Roads
 B double access
 Telecommunication access
 Education
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IN CONCLUSION
I like farming.
In particular I like farming profitably. It is a worthwhile vocation, but it is not a hobby. If the world is to be
fed and clothed farming must be done profitably, both now and into the future.
To be done profitably it must be done by well capitalised farm businesses, utilising the skills of well educated
and highly skilled managers.
Currently a large proportion of farms are too small or too poorly capitalised to access the skills and capital
required to transform them into viable businesses. The current trend towards aggregation of management
and ownership should go some way towards allowing the evolution of business structures better suited to
the modern world.
Take a deep breath, it will be an exciting ride, but for those with the right skills and attitude it will be a
rewarding one.
Growth Farms
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