“All farms can be profitable if risk is managed appropriately.”
This was the key message delivered by South Australian consultant Ed Hunt to members of BCG’s GAPP groups earlier this year.
Ed farms at Wharminda and consults on the central and lower Eyre Peninsula to clients who farm in low and high rainfall areas. He has over 10 years’ consulting experience, specialising in the financial analysis for his clients’ businesses.
BCG invited Ed along to the February GAPP meetings to share his practical and simple approach to business benchmarking and to generate some discussion based on insights from his Profit and Risk workshops which were held at West Wyalong in New South Wales, Birchip and Ouyen in Victoria and Waikerie, Karoonda, and Cummins in South Australia in 2014 and 15.
The aim of these workshops was to give farmers the skills to simply evaluate their farm business on an ongoing basis and to maintain a risk position for long term viability.
At each workshop, a ‘model farm’ was set up to represent a typical farm in the district. The farmers and advisors attending the workshop then had direct input in to how the farm was run and, because this was a theoretical exercise, they could employ different strategies under different scenarios (eg size, cropping intensity and enterprise mix) to generate a detailed and thorough analysis of how farms would perform in their region with a range of variables that farmers can face.
To get an indication of exposure to risk, cash flow and end cash balance for the farm model was calculated for a decile 1, 3, 5, 7 and 9 season. This analysis was then repeated across multiple scenarios and was evaluated on enterprise mix, business expansion, machinery investment, different input approaches, off farm income and overall effect on debt.
What were the outcomes?
According to Ed, one of the key messages to come out of the project was that analysing business performance based on an average year wasn’t a reliable indicator of risk.
At Ouyen, the net cash flow over 12 months for a farm with 80 per cent equity was analysed for a range of deciles and 60 per cent, 70 per cent and 100 per cent cropping intensities (Figure 1).
Figure 1. Ouyen farm net cash flow over 12 months for a Decile 1, 3, 5, 7, and 9 season with 80 per cent equity.
This showed that the average season (decile 5) was a ‘tipping point’ where all three farms had similar profitability. However while the 100 per cent cropping scenario (continuous cropping) had a higher chance of profitability in the good seasons, it has the most capacity to lose the most in Decile 1 years. The mixed farming scenarios had less of a loss in the poor seasons and thus continuous cropping could be considered riskier.
“This analysis also indicates livestock in the system (in 60 and 70 per cent cropping scenarios) will reduce risk,” Mr Hunt said.
He also suggested a proportion of machinery investment may need to be shifted to average and above average seasons.
Other key messages from Ed’s presentation:
- Each farm has a different risk position based on soil types, enterprise mix, management, input variation, off farm income and current debt
- Equity and average whole farm budgets do not indicate the risk of the farm operation
- Take more responsibility into decision-making on your farm. Challenge and understand every input into your farm. Be the decision-maker
- You can make more informed decisions by completing cashflows and working out profits for different decile years
- Good farm businesses have a manager that is progressive and intuitive and knows when to take a risk and when not to
- 100 per cent cropping can make the most money in a Decile 9, but also lose the most in a Decile 1
- The most difficult decision is the judgement call and this requires the most experience
GAPP Coordinator Linda Walters said sessions with an agronomic and economic focus were an important component to the GAPP program.
“It’s great to learn about managing risk and how even in low decile years, farmers can still have a profitable season,” she said.
“That’s a positive message.”
Read about Ed’s previous Profitability and Risk work with BCG here.
