With all the headlines about agriculture over the past six months seeming to have included words like ‘drought’, ‘debt’ and ‘disaster’, it is easy to overlook the fact that there has been a significant favourable turnaround over the past couple of years in four very important factors that have a major influence on the ability of farm businesses to generate profits. These are exchange rates, interest rates, fuel prices and rainfall. Exactly how much impact these changes have had for the ‘average’ farm business is worth considering.
To put the extent of the changes in the first three factors in perspective, it is worth comparing current rates for all of these with the situation exactly three years ago.
In January, 2012, the Reserve Bank reported that average interest rates for small business (non-residential) finance was 8.5%, and by January 2015 this had fallen to 7.1%. In January 2012, the Reserve Bank reported average A$/US$ exchange rates to be A$1.06/US$1, while in January 2015 the average exchange rate quoted was A$0.78 per US$1. In January 2012, the Australian Institute of Petroleum quoted average regional (non-capital city) diesel prices of 151 cents/litre, whereas in January 2015 these were reported to be 126c/litre – still high by city prices, but a substantial reduction from their 2012 levels.
All these changes will undoubtedly have a positive impact on farm profitability, and it is interesting to try to estimate exactly what the impact might be, both at the individual farm level and for the sector as a whole.
Starting with interest rates, the current total level of rural debt reported by the Reserve Bank (December 2014) was $64.6 billion dollars. At an average interest rate of 8.5%, the annual interest bill for farmers on this debt would be approximately $5.5 billion, whereas at an average interest rate of 7.1% the interest bill would be $4.5 billion, a net saving in interest payments for the agriculture sector of approximately $1 billion. Not all of this saving would have been achieved, because historically approximately 50% of rural borrowings are at fixed interest rates. So assuming that half this saving has been realised as a consequence of lower interest rates, then the sector-wide saving is estimated to be $500 million, or an average annual saving of $4,100 for each of Australia’s 121,000 farm businesses.
Calculating the benefit of lower exchange rates is a little more difficult, beacuse of the interaction between exchange rates and commodity prices, and also because while a lower A$ increases export commodity prices, it also increases the prices farmers pay for imported inputs like machinery, fertiliser and fuel. To some extent this latter issue can be factored into calculations by calculating the exchange rate impact on the net value of farm output, rather than the gross value. Ignoring changes in commodity proces (that is, assuming that global agricultural commodity prices have remained constant over the three years), assuming that the full benefits are passed on to farmers in market prices, and based on net farm output reported by the ABS for 2012-13 (the most recent year available) of $21 billion, the exchange rate impact would be worth $5.5 billion to the farm sector, or an average of $45,450 per farm.
Calculating the direct benefit of lower fuel prices for the entire agriculture sector is challenging, because of the need to factor in the diesel fuel rebate paid to farmers for off-road diesel use, and also because comprehensive statistics are only available for the 55,000 broadacre farms, and not the entire farm sector. The diesel fuel rebate was essentially constant over the past three years, so need not be considered in calculating the savings associated with lower fuel prices. According to the ABARES Agsurf database, the total cost of fuel for the average Australian broadacre farm was $26,000 in 2012. The decline in fuel prices since that time equates to an average saving of $4,300 per broadacre farm, with the average direct savings likely to be considerably less for non-broadacre farms (horticulture, dairy, intensive livestock etc.). Of course, as the agriculture sector is a significant user of transport services (the most recent ABS estimates for the sector was around $1.4 billion of transport services in 2009-10), there would also be significant indirect savings for farmers associated with lower fuel prices.
The above calculations are necessarily approximate, but give some sense of the likely impact of each of these three changes (interest rates, exchange rates and fuel prices) over the past three years. On a per farm average, lower interest rates are estimated to have added $4,500 to farm business bottom lines, exchange rate changes have added an estimated $45,450 benefit, and lower fuel prices are estimated to have added $4,300 to the profitability of an average broadacre farm. The significance of these numbers becomes apparent when they are compared with the average broadacre farm profit of approximately $28,900 reported by ABARES in 2012.
Estimating the value of the fourth ‘leg’ of the quadrella – rain – is even more complicated, as it depends on amounts, seasonality and geographic spread, none of which are easily quantifiable. Perhaps the most reliable indicator available is the difference in the value of gross agricultural output in Australia in 2009-10 (the last year of widespread drought) and 2011-12, a year of reasonable seasons throughout Australia. The gross value of agricultural output in 2011-12 was some $8 billion higher than the 2009-10 result, equating to an average $66,000 benefit to the average farm.
Whether recent rainfall has been sufficiently widespread to deliver that sort of benefit in 2015 is as yet unclear, but the figure serves as a pretty strong reminder that, of all the factors that can impact on the profitability of farm businesses, rain is the one that matters most!
This article was originally published on the Australian Farm Institute website. To view the original article click here
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