Best laid plans of mice and men can go astray!

This phrase basically means no matter who or what you are the best laid plans can and will go astray. Operating a business in Agriculture is a bit like that, there are some circumstances when no matter how well you plan financially for example there will always be a curve ball in there somewhere, drought, live export bans, market crashes to name only a few,sometimes things work in your favour, sometimes not.

I don’t have the answers for Australia’s current rural debt problems, I’m not comfortable with debt and it worries my husband and I from day to day the debt we owe to ensure it is serviced and able to be repaid in the longterm. There is always the balancing act of how to improve and increase productivity with out bogging yourself in what I call caustic debt. That being the rock solid debt that you can never get off your books and you can’t trade out of.

Caustic, crippling debt is of very real concern in the community at present. It is the focus of a senate inquiry to consider ways to implement policy that can assist agricultural businesses to combat the root causes of it, costs of production, profitability and long term sustainability.

I encourage people to write a submission to this enquiry to voice your opinion on the establishment of  the Reserve bank Amendment (Australian reconstruction and development board)Bill 2013. Presented by Senator Nick Xenophon and Senator John Madigan in December 2013.

Part of the explanatory background states that the “aim of this bill is to create a specific entity tasked with examining, reconstructing and improving the financial status of the Australian agricultural sector and its associated industries and infrastructure”

If you would like to voice support or opposition to this bill, or have ideas on how agriculture policies can be improved in regards to circumstances that affect it then use this link to submit your ideas. Senate Inquiry – Reserve bank amendment Bill 2013 inquiry

You don’t have much time submissions are due by 10th February 2014. They don’t need to be great long essays, just your view.

As I have been looking at this bill for some time and I tend to look at ABARES statistics for information of a long term nature I have put these charts together from the excel downloads that are available from the Australian Bureau of Statistics – Agricultural Commodity statistics 2013.

Now I’m not a statistician and I don’t claim to understand what index factors mean or how some of these figures are achieved by mathmatical geniuses in Canberra but I don’t think there can be any denial that Australian agriculture debt is an increasing problem and costs of production and lack of return on goods we produce is its leading cause.

1. What are we producing and whats is it really worth?

I’m  happy to be corrected on anything I have given as my view of these charts. Particularly this first one. This chart says to me 40 years ago we were producing a heck of alot less but it was worth nearly 4 times its value at todays index, yet now in 2012 we are producing 5 times as much but realistically worth half of what it was 40 years ago. Clear as mud!!!!! Gee I hope I have that wrong!

net value production #1_edited-1Chart 1. Net Value Production index of that value as per ABARES ACS 2013. Table 13.

Notes accompanying this chart by ABARES

  • The Net value is obtained by the subtracting the farm costs for the year from the Gross value of farm production for that same year.
  • The Index of the net Value of farm production is obtained by deflating the net value of farm production by the consumer price index.

2.Costs of production.

Did you ever think Diesel wouldn’t go over the $2 a litre. I remember my parents having a great debate when a kid because my old man wanted a diesel ute, diesel was 30c/lt, petrol was 60c, I remember him saying diesel will never cost as much as petrol. He bought the ute  because it was going to save heaps in running costs, so mum was pleased. I just thought the ute was cool because it was bright orange.

Diesel._edited-1Chart 2. Off Road Diesel Prices as per ABARES ACS Table 90 – Australian Farm Fuel prices.

3. Extreme Interest.

Remember when interest rates hit 20%, I can’t help but think some of the debt now is because we think interest rates are cheap, and therefore easy money, This is Australia’s track record in regards to the rural lenders interest rates.

Indicative interest rates. _edited-1Chart 3. Indicative interest rates for the Australian Farm sector ABARES ACS 2013. Table 75

4. Whats the damage?

Now this is one scary graph!

Rural Indebtness_edited-1Chart 4. Rural Indebtedness to financial institutions ABARES ACS 2013. Table 76.

Notes accompanying this chart by ABARES

  • All banks – derived from all banks lending to agriculture, fishing and forestry
  • Government agencies includes state banks and advances made under war service land settlement. Before 1996, Includes loans from the QLD Industry development corporation. From 1996 these loans included in bank lending.

Consider on a shorter time frame since 2000, the exact same information from above in chart 4. I hope it seems to have plateaued.

rural indebtness 13yrs_edited-1

Chart 5. Rural Indebtedness to financial institutions ABARES ACS 2013. Table 76.

In 2000 / 2001 Australian agriculture had a collective large institutional debt of $28,514 Million, by 2012/13 this had increased by 125% ($35,789 Million) to be $64, 303 Million.

If we go back to the first chart – Net farm production our net value of farm production in 2000/2001 was $8,121 Million, at last count in 2012/2013 this had only increased by 32% to $10,774 Million.

So does this mean for every dollar of debt we only earned only 30c in adding to our production? Again, I’m happy to be corrected on these comments. But to earn only 30c for every $1 spent sounds very much what my current business plan of spending to income is and it’s not a good scenerio!

5. Does anyone save for anything anymore?

I wish there was more incentive for people to put a deposit down, lay by, have some cash reserves, unfortunately there only seems to be tax incentives to spend money, to borrow to lease. Here is where I think a shift in peoples thinking needs to occur. We need methods of finanicial structure where we can help ourselves, to put away for the bad periods, to keep that wheel turning. Of course saving money depends entirely on people haveing reserves to put away and that comes back to what are we being paid for in the products we produce?

This chart is for ATO – Farm management deposits that only individuals are eligible for, I think something the new reserve board should consider is to allow FMD’s applicable to companies and entities that could benefit by also putting money away. The problem being, the government don’t really like savers, as that affects retail etc by keeping money out of circulation. Personally I think people saving and being rewarded for reduction in debt would have much better long term effects than encourging spending.

FMD_edited-1Chart 6 – Farm management deposits. ABARES ACS 2013. Table 76.

Farm management deposits at 2012/2013 were valued at $3,721 Million, about 6% of what the total value of debt was at $64,303 Million.

6. Now, why on earth do I look at this stuff?

One of my biggest gripes is the producer doesn’t get paid for what they produce, we’ve all heard the term price takers, not makers. We sell cattle and get less than $1 liveweight per kg and then walk down a retail isle and see absolutely nothing under $10 a kg and certainly not a decent steak but it’d be sausages or some rubbish. Dare I look at steak it’d be up around $20/kg.

We see wage earners demanding wage increases equal to CPI and getting it, well its kicking them now because Australian employers can’t afford to pay them.

The live exports boats are paying up around the $2 live at the moment, we’re all going “that’s great, gee wish i had a 1000 head to put in”. The thing is this is the price we should be getting all the time, we should be viewing this as the norm. I don’t sell much to abattoirs but when I hear of people getting less than $1/kg I just have to wonder, someone is taking advantage of those people and that shits me.

A report released in 2009, the Northern Beef situation analysis had conducted a study of North Australian properties across WA, NT and QLD and came to the conclusion that

“The major issues facing the industry include inadequate scale in the more closely settled areas, significant cost escalations in both overheads and direct costs, doubling of debt per livestock unit (LSU) over the last decade while return on assets (ROA) has declined to very low levels of 0.3% up to 2% on average” (Page 2)

I dispute that every one needs massive scale to be profitable, with scale comes staff the biggest profit killers of all. But I agree completely with the escalations of costs and poor returns.

So first I thought the processors were making the money. I’m not sure how these companies sell to other companies which sell to their overseas owned companies and I suspect many are making a lot more than they let on but these are some figures I found to their earnings.

meat processing margins jpg_edited-1Chart 7. Industry costs of the meat processing sector. Source IBIS world. Meat processing in Australia. January 2014.
The column on the right indicates that the meat processors are making an average profit margin of 3.8%.

Teys Australia-A Cargill who process 12.7% (JBS process 16.8%, Nippon 4%, Midfield 3.2%, Fletcher 2.7%)of Australias read meat production claim their processing plant at Beenleigh abattoir (QLD)  site in 2013 operated on a 1% ROA over the last 4 years.
The red meat processing is made up of 65.8% beef, 23.4% lamb and Mutton and 7.9% pork, others are mainly goat.
68.1% is exported, the rest is to wholesalers (8.4%), retailers (7.2%), food service industries (11.4%) and food manufacturers (4.9%).

So I wondered how much the retailers were making as I happened to come across this graph.

retail margins in Australia_edited-1Chart 8. Food retail Margins – ABARES – Australian food statistics 2011/12. Pg 12

Woolworths alone sell 30% of the red meat in Australia (2012/13) (IBIS Oct 2013). Woolworths have the largest retail margin in the world (2010/11)  in Australia at 7.4%, yet rank 17th in world sales turnover and number of stores held world wide.

I made this chart up from ABARES to look at the difference in what the producer gets for a live animal to what retail of meat is sold for.

retail beef, 1990-2013jpg_edited-1Chart 9. Comparing producer saleyard earnings to retail of meat prices. Source ABARES ACS. 2013 Table 131 & 132.

Notes accomanying ABARES table

  • Weighted saleyard price is a weighted average saleyard price for yearlings, ox and cows.
  • Saleyard prices are for quality stock of monthly average of fat stock prices in each major state market.

From the year 2000, retail increased its prices by  51.1% to 2010, Saleyard weighted average increased by 28.6% over the same period. Considering both made gains I still think the retail margin is too high. Please keep in mind these saleyard prices are not what producers were getting for low condition cows or stock during the current sales.

To display this information in a different format I did the following chart

Beef % retail_edited-1Chart 10. Comparing saleyard earnings to live animal differences in prices. Source ABARES ACS 2013,2012,2011,2010 & 2009.

While I thought 460% increase on mark up of saleyard price was steep, I considered costs of processing, at about $300 per head currently forecast and cost of refrigeration, transport and storage would be hugely expensive. So I’m not in a position to say if retail prices are way above where they should be, though I think they seem high. Remember they only sell 7.2% of production.

What did surprise me was the following graph where I tried to compare the same saleyard and retail price graphs of beef to lamb and pork. What concerns me is beef is consistently 40% higher in difference to lamb and pork.

comparing retail %_edited-1Chart 11. Comparing differences of saleyard to retail prices. Source ABARES ACS 2013 Table 131 & 132.

Back to my original introduction of the reserve board I hope it is discrepancies in the retail of meat products like the differences in beef prices to others that I hope they take into consideration when looking at profitability of the meat industry.

If it was possible to get retailers to drop their mark ups on beef products and enable more sales I would hope the extra sales would make up for the loss of their profit margin and more money would filter to the producer. I suspect our problem still lies squarely at the feet of the processors as to what they are paying for the produce when the majority and I suspect prime is exported. Without profitability across the whole meat supply chain as a fairer distribution of that profit then eventually it will be a house of domino’s and the lot comes down.

Making production properties bigger is not necessarily always better because the only ones able to afford to operate soon will be overseas operatives, if something isn’t done about Australian agricultures finanicial stability and longevity now then many producers are going to go to the wall. I don’t want to see that happen.

Categories: Australian abattoirs, Beef Industry, Legislation, Live Exports, Politicians, Property operations, Sheep industry, Uncategorized | Tags: , , , , , , , , , , , , , | 1 Comment

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One thought on “Best laid plans of mice and men can go astray!

  1. Enjoyed reading this post Jo, as I’ve been thinking a lot about ‘sustainable cattle operations’ firstly since McDonalds mention of only buying off these, and then last week listening to head of NFF Brent Finlay talk about increasing profitability at farm-gate. As much as it absolutely needs to happen, and agriculturalists have become masters of managing costs, I just don’t know how we can expect processors or any of the other ‘middle men’ to reduce their own profit levels to help us. I just don’t know what the answer is. Obviously cattle markets are dictated by supply and demand, it’s a shame we can’t rally as a group to hold onto our product and as such, increase demand, and therefore prices.
    I’m just thinking out loud. Really enjoyed your post though. Hope you’re getting some rain in the north.

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