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Northern beef report says profitability is low, but not trending down

Jon Condon, 14/04/2014

 

A comprehensive review of northern beef industry profitability over a 12-year cycle has found that while levels of profit on average have been low, they have not trended downwards.  

The 2013 Northern Beef Situation Analysis is a detailed financial study commissioned by Meat & Livestock Australia, scrutinising the performance of the northern beef industry by region, market and herd size over the period 2001-2012.

While the region’s overall enterprise profitability has not tended downwards over the period, profitability among the top performers across the industry has tended to move lower.

“Profit after interest is decreasing, and is mostly negative, as a result of increasing debt with no increase in profits,” report authors Bush AgriBusiness and Holmes & Co said.

The majority of northern beef producers were not economically sustainable, as they are unable to fund present and future liabilities, the report found.

The report clearly identifies what separates the top performers and what factors determine the profitability of a northern beef business. It also provides analysis of a wide range of measures, providing the means for individual producers to understand their herd and business performance and to improve by setting realistic targets.

While the report analyses in detail the performance of the northern beef industry from 2001 to 2012, the methodology used may not fully-capture the impact of the recent Indonesian live export market closure and consequent impact on cattle prices and demand, its authors say.

That’s because in incorporating publicly-available ABARES data with privately held data, it has used the ABARES data in three-year average blocks, to provide volume in order to lift the reliability of the information.

Consequently, the final three-year block for 2010-2012 may not fully-capture the impact of the live export crisis that developed after mid-2011.

Nevertheless the report provides a comprehensive picture of the performance of the northern beef industry by region, herd size and market. It bases ‘economic sustainability’ on clear definitions, which are used to assess industry performance.

On the basis of these definitions, the data indicates that the majority of northern beef businesses are not economically sustainable at present.

“But this is not a recent phenomenon, with recent average business performance, before financing, similar to longer-term averages,” the report authors found.

“Economic sustainability takes a longer term view; in the short-term many northern beef businesses are struggling to survive with cash deficits accumulating,” they said.

While profits before financing are largely unchanged on average over the 12-year period analysed, performance after financing was added was deteriorating, due to increased debt, with no increase in profit, the report found.

Income has decreased over the period analysed, mostly a function of declining beef prices rather than a decline in productivity (as measured in kilograms of beef produced per adult equivalent).

Some other key findings:

  • Costs have reduced as income has reduced, through belt-tightening, and improved labour efficiency, resulting in little change in profits.
  • Profitability of the top performers has declined over the longer-term, suggesting that industry profitability is decreasing.
  • Excluding land value changes, return on assets has averaged less than 1pc across the industry over the last three and twelve-year cycles to the end of 2012.
  • Comparison of profitability is made between businesses that supply different markets: live export, slaughter and store cattle sales. When the effect of scale is excluded, producers primarily supplying the slaughter market recorded the highest profit per adult equivalent, due primarily to better productivity.
  • Both total numbers of cattle in the north and stocking rates have risen, but what these stocking rates are relative to carrying capacity is unknown. The extent to which environmental capital is substituting for financial capital is also unknown.

Big variations exposed

There was considerable variation evident in performance between beef businesses within the northern industry.

The Top 25 percentile performers (across all regions, herd sizes and markets) consistently outperformed the average and had businesses more likely to be economically sustainable over the long-term. This indicates that there are successful business models for producing beef in northern Australia.

Report authors suggested the superior performance of the Top 25pc producers could be attributed to:

  • Higher income through better herd productivity.
  • Lower operating expenses, largely through better labour efficiency.

There was no evidence that superior long-term performance could be attributed to a higher average beef price received, more rainfall or better quality land.

Scale of operations

Operating scale (number of adult equivalents under management) had a significant influence on business performance. Operating scale, along with labour efficiency, could explain most of the differences in overhead expenses per AE between businesses.

Lack of operating scale was a major impediment for smaller beef businesses (less than 3000 adult equivalents), but the benefits of additional scale for larger businesses are limited with herd profits decreasing as herd sizes become very large.

There appeared to be an optimal operating scale range, either side of which different factors could erode performance, report authors found.

“It is paramount that smaller producers understand the implications of operating scale on their viability and how best to address to it. There is mounting financial pressure for smaller producers to make structural changes to their business,” they said.

Labour efficiency

Efficient use of labour was a key finding among producers in the Top 25percentile group.

“Labour costs and achieving a highly efficient use of on-farm labour is a challenge that the industry must understand and work towards,” the report said.

There was no evidence of expense increases over the period analysed. That was not to say that some input costs had not increased in real terms, but any increases had been absorbed and the overall cost structure of businesses had not increased.

Income differences

Differences in income, rather than expenses, explained more of the differences in profit between average and Top 25pc performers. Nearly all the differences in income per AE between herds were attributable to productivity differences.

Nearly all productivity differences between herds could be attributed to the better performers achieving higher reproductive rates, lower mortality rates, and heavier sale weights.

Repot authors said the findings would help make it possible to construct a clear roadmap for economic sustainability for a northern beef business, embracing both location and target markets.

Such a roadmap would provide clear guidelines on factors critical to income (productivity) and expenses (scale and labour efficiency).

The analysis contained in the report is consistent with other recent and more-targeted studies of northern herd productivity, reproduction and mortality, such as the recent CashCow project (see Beef Central’s earlier report here).

The analysis also found wide variation between businesses in these same measures of herd productivity, and agrees with CashCow that improvements in herd productivity have a big influence on overall business performance.

“There is wide variation across the industry in what it costs to produce a kilogram of beef (cost of production) and this analysis shows that there is significant scope for improvement for a lot of producers,” the report said.

“There is far less variation in beef price received and much less scope for individual producers to improve beef price received. Therefore it could be said that it is the high cost of production that is the main cause of low profits for the majority of northern beef producers.”

 

  • Beef Central will apply further scrutiny to the full Northern Beef Report, after it is released by MLA in coming weeks. 

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