By Rob Grima, Planfarm Pty Ltd
Planfarm Pty Ltd recently completed an analysis for Future Drought Fund’s Regional Drought Resilience Planning Project, currently being implemented in the Mid West region by NACC NRM and the Mid West Development Commission. The study found that most farm businesses (>50%) in the region have a high degree of resilience. They are well prepared to survive the financial impacts a drought may cause. Conversely, only a small percentage (<10%) were considered vulnerable.
The study looked at the current (2020) performance of 36 farm businesses and compared it against two previous time frames: 2006/07 and 2019. This historical analysis demonstrated that the financial impact of the 2019 dry year was more severe on farm businesses than the combined effect of the 2006 and 2007 drought years. This was represented in an equity drop of 10% in 2019 versus only 8% for 2006/07. While there was more rain in total in 2019 than in 2006/07, its distribution was poor and crops did not finish well. Whilst yields were below average, spending was not and as such the financial result was severe.
This tells us a few things:
- Farming businesses must be resilient to various forms of production and financial shock, including but not limited to drought;
- A poor rainfall pattern, and not necessarily the total amount of rain received, can be highly damaging to finances; and
- The businesses represented in the 2020 cohort have already demonstrated their resilience and capacity to survive financial shock related to poor seasons.
In this study, all businesses were assessed for their relative viability in terms of their Asset & Liability (A&L) strength and Profit & Loss (P&L) strength against. This can be seen in the figure below. A&L strength is determined by the business’s equity per family unit, % equity and loan valuation ratio at the end of 2020. P&L strength is determined from the 6-year average for return on capital, % operating efficiency and income per family unit. The graph indicates those further to the right have higher A&L strength, and those higher up in the graph have higher P&L strength.
Those in the top right have a highly resilient business, strong in both P&L and A&L. They tend to be larger growers in the medium and low rainfall areas and few keep livestock. Those in the bottom left corner are the most vulnerable of the cohort. These tend to be smaller businesses that are either relatively new (no generational wealth distributed to them) or have had other financial issues. The other two quarters are moderately strong and also likely to survive drought-like conditions. Those with higher profits but fewer assets (top left) are often newer businesses currently increasing in scale. Those with lower profits but relatively high assets (bottom right) are multi-generational businesses in the higher rainfall areas, more involved in livestock production than businesses in the other quarters.
Most farming businesses in the cohort are moderately to strongly resilient, and have recently demonstrated this resilience by surviving the 2019 season. Financial losses can occur for lots of reasons, and drought is one of many risks that farmers in our region face. Well-capitalised businesses with a good profit history are highly likely to survive despite these risks.
For more information contact Dr Fiamma Riviera at fiamma.riviera@nacc.com.au or by calling (08) 9938 0100.
This program is supported by DPIRD, through funding from the Australian Government’s Future Drought Fund.
