Farm performance: broadacre and dairy farms, 2016–17 to 2018–19

This article presents results from ABARES most recent surveys of Australian broadacre and dairy farms (see Box 1). The surveys collected detailed information on the physical and financial performance of broadacre and dairy farms in 2017–18, as well as farm managers’ estimates of key production, receipts, costs and farm debt variables for the 2018–19 financial year. ABARES uses these estimates to generate projected values of key financial performance indicators for 2018–19. Final ABARES survey results for 2016–17 are also reported. Unless otherwise noted, all financial data in the text and tables are in nominal dollars. Time-series graphs are used to illustrate longer-term trends in key financial performance variables. Financial variables shown in these graphs are displayed in real terms (2018–19 dollars). A map of the regions used by ABARES to disaggregate state-level results is included in this report (see Map 1).

Farm performance in 2018–19 heavily influenced by drought

In 2018–19 drought in much of south-eastern Australia is the dominant influence on the financial performance of broadacre and dairy farming in Australia. Crop production in south-eastern Australia in 2018–19 is projected to be well below average due to drought, contributing to higher prices for fodder and feed-grains across the country. The drought has also reduced the availability of pasture on livestock farms in drought-affected regions, increasing expenditure on purchased feed for livestock.

For cropping farms in drought-affected regions, farm incomes are projected to be substantially lower in 2018–19 (on average) due to lower crop areas and yields. Elsewhere, high prices for most grain, oilseed and grain legume crops are helping to keep incomes for cropping farms at historically high levels.

For sheep and beef producers, high prices for purchased feed are adding substantially to costs in 2018–19. Average expenditure on purchased feed is projected to increase in all states and territories this year. The biggest increases (in percentage terms) are expected in those states and regions where drought conditions have been more severe and sustained.

At the aggregate level, the effect of the current drought on the economic performance of broadacre farms is not expected to be as severe as that of previous droughts (Figure 1). On average across all broadacre farms, most measures of farm financial performance in 2018–19 are expected to be above longer-term average levels, despite the drought. This reflects two main factors. First, the geographic reach of the current drought is less extensive than that of the Millennium Drought (the 2002–03 to 2006–07 drought). Second, high to very high prices for most broadacre commodities are supporting incomes in drought-affected regions. In regions not affected by drought, high commodity prices are contributing to high farm cash incomes, particularly in those regions with broadacre cropping enterprises and with livestock farms that are less reliant on purchased feed.

For Australia as a whole, the average farm cash income for all broadacre farms is projected to fall by 18% between 2017–18 and 2018–19 — from $201,300 per farm in 2017–18 to $173,000 per farm in 2018–19 (Table 1). However, this would still leave average farm cash income in 2018–19 well above the longer-term average of $140,000 per farm in real terms for the 10 years to 2017–18.

Average farm business profit (farm cash income adjusted for changes in livestock and grain inventories, as well as capital depreciation and the imputed value of family labour) is projected to fall from $62,500 per farm in 2017–18 to $33,000 per farm in 2018–19. This is just below the longer-term average.

Regional differences more pronounced in 2018–19

The adverse impact of the drought on average broadacre farm profitability is not expected to be as severe as that recorded in previous droughts, but the aggregate and average results mask important regional and industry differences. For example, in north-western New South Wales and parts of southern Queensland, farm cash incomes in 2018–19 are projected to be substantially lower because these regions have experienced prolonged rainfall deficiencies. In the North-West Slopes and Plains region of New South Wales, the average farm cash income is projected to be just $1,000 per farm in 2018–19, compared with $221,000 per farm the previous year (Table 8). This is the result of severely reduced crop production and much higher expenditure on purchased feed for livestock.

Outside the drought-affected regions of south-eastern Australia, broadacre farm incomes in 2018–19 are projected to remain above longer-term average levels and in some cases surpass previous record levels. In Western Australia, average farm cash income for broadacre farms is projected to reach nearly $490,000 per farm in 2018–19, an increase of 30% on the previous year ($368,800 per farm). If achieved, this will be the highest average farm cash income recorded in over 40 years for this state. This is the result of timely in-season rainfall resulting in good yields for winter crops and high grain, lamb and wool prices.

a Excludes leased plant and equipment. b Average per responding farm. c Farm capital minus farm debt. d Equity expressed as a percentage of farm capital. e Rate of return to farm capital at 1 July. p Preliminary estimates. y Provisional estimates. na Not available.
Note: Figures in parentheses are standard errors expressed as a percentage of the estimate provided.
Source: ABARES Australian Agricultural and Grazing Industries Survey

Industry results reflect mixed effects of drought on production, commodity prices and costs

Between 2017–18 and 2018–19 average farm cash income and average farm business profit is projected to decline for each of the broadacre industries except the sheep industry (Table 2, Figure 2 and Figure 3). In the sheep industry, higher farmgate prices for lambs and wool are helping to offset the adverse effects on farm incomes of increased expenditure on purchased feed and some other cost items are being cut back, including purchases of livestock. In the other broadacre industries, lower farm incomes for farms in drought more than offset the generally higher incomes for farms not in drought. For example, in the wheat and other crops industry, the average farm cash income in 2018-19 is projected to fall by just under $100,000 per farm compared with the previous year (from $390,400 per farm in 2017-18 to $295,000 per farm in 2018-19) (Table 2). This reflects the net outcome of very different underlying changes for this industry at the state level, such as a reduction in average farm cash income of around $380,000 per farm in New South Wales (Table 8) and an increase of around $250,000 per farm in Western Australia (Table 12).

As with broadacre farming, the financial performance of dairy farms in 2018–19 varies across regions, largely reflecting differences in exposure to drought and higher fodder prices (hay and feed grains). At the national level, the average farm cash income on dairy farms is projected to fall by around $67,000 per farm between 2017–18 and 2018–19 — from $160,900 per farm in 2017–18 to $93,000 in 2018–19 (Table 6 and Figure 5), a decline of 43%.

p Preliminary estimates. y Provisional estimates.
Source: ABARES Australian Agricultural and Grazing Industries Survey

a Rate of return to farm capital at 1 July. p Preliminary estimates. y Provisional estimates. na Not available.
Source: ABARES Australian Agricultural and Grazing Industries Survey

At the state level, changes in farm financial performance between 2017–18 and 2018–19 vary considerably (Figure 4, Table 4 and Table 5). In the states most affected by drought — New South Wales, Queensland, Victoria and South Australia — average farm incomes are projected to decline in 2018-19 compared with the previous year. These changes reflect lower production (particularly on cropping farms) and higher purchased feed costs. In Western Australia, Tasmania and the Northern Territory, average farm cash income is projected to increase in 2018-19 compared with the previous year, with higher production and receipts more than offsetting an expected increase in cash costs, particularly purchased feed.

Region and industry-level differences are even greater, largely reflecting the geographic reach of drought, which is being felt most strongly in the wheat–sheep and pastoral zones of southern Queensland, New South Wales and north-eastern South Australia, and the wheat–sheep zone in Victoria.

p Preliminary estimates. y Provisional estimates.
Source: ABARES Australian Agricultural and Grazing Industries Survey

a Rate of return to farm capital at 1 July. p Preliminary estimates. y Provisional estimates. na Not available.
Source: ABARES Australian Agricultural and Grazing Industries Survey

Between 2017–18 and 2018–19 average farm cash incomes on dairy farms are projected to decline in all states except Tasmania. Reductions range from 66% in New South Wales to 24% in South Australia (Figure 5, Table 6 and Table 7). This is mainly a result of higher expenditure on purchased feed and reduced milk production. The trend towards more intensive feeding of cattle means that many dairy farms are now more exposed to changes in the prices of purchased fodder (hay and feed grains). Drought has driven up the market price of water in 2018–19 (BOM 2018). As a result, dairy farms in Murray–Darling Basin irrigation districts that rely on buying water on the temporary market are also facing higher costs.

p Preliminary estimates. y Provisional estimates.
Source: ABARES Australian Dairy Industries Survey

a Rate of return to farm capital at 1 July. p Preliminary estimates. y Provisional estimates. na Not available.
Source: ABARES Australian Dairy Industries Survey

New South Wales

In 2018–19 the far west and north-western regions of New South Wales are expected to record the largest declines in broadacre farm incomes (in percentage terms) compared with the previous year (Table 8). Projected reductions in average farm incomes at the regional level reflect the negative impacts on crop production and pasture growth of rainfall deficiencies in 2018. These were typically less severe from north to south in the NSW wheat–sheep zone.

In 2018–19 all five broadacre industries in New South Wales are projected to record lower average farm incomes compared with 2017–18. The biggest reduction is expected for farms in the wheat and other crops industry. For livestock industries (beef, sheep and sheep–beef), average farm incomes will be lower, due mostly to higher purchased feed costs. Wool and lamb prices are forecast to be around 15% higher in 2018–19 compared with 2017–18. This is expected to limit the decline in average farm cash incomes for the sheep and sheep–beef industries.

For the NSW dairy industry, average farm cash income is projected to fall by 66% in 2018–19 compared with 2017–18 (Figure 8). Overall, farmgate milk prices are expected to be slightly higher this year but milk production is projected to fall by more in percentage terms, leading to a decline in milk receipts. In addition, high prices for hay, silage and feed grains are contributing to an increase in purchased feed costs — a major expense for this industry. The average farm business profit is projected to fall from $48,000 per farm in 2017-18 to $-123,000 in 2018-19, with a projected run-down in livestock inventories adding to the reduction in cash incomes.

p Preliminary estimates. y Provisional estimates. RSE Figures in parentheses are standard errors expressed as a percentage of the estimate provided.
Source: ABARES Australian Agricultural and Grazing Industries Survey and Australian Dairy Industry Survey

Victoria

For broadacre farms in Victoria, 2017–18 was a comparatively good year. Average farm cash incomes were at or above longer-term average levels in all regions and across all broadacre industry groups (Table 9 and Figure 9). In 2018–19 average farm cash incomes are projected to decline in the main cropping regions of Mallee (region 221) and Wimmera (region 222) due to drought. In the Central North (region 223) and Southern and Eastern Victoria (region 231), average farm cash incomes are projected to be largely unchanged in 2018–19 compared with the previous year. Higher revenues from sheep, lambs and wool are projected to offset higher purchased feed costs.

At the industry level, cropping specialists in Victoria are expected to record a large reduction in average farm incomes in 2018–19. This is because of a substantial decrease in revenue from cropping as a result of reduced production due to drought. Farm performance in the livestock industries is less affected — average farm incomes in 2018–19 are projected to be similar to those recorded in 2017–18.

For dairy farms in Victoria, the return to profitability in 2017–18 is expected to be short-lived. In 2018–19 average farm cash income is expected to fall by around half and average farm business profit is expected to be strongly negative (Figure 10). Reduced milk production and markedly higher costs for purchased feed and water are the main drivers.

p Preliminary estimates. y Provisional estimates. RSE Figures in parentheses are standard errors expressed as a percentage of the estimate provided.
Source: ABARES Australian Agricultural and Grazing Industries Survey and Australian Dairy Industries Survey

Queensland

Financial performance of Queensland broadacre farms declined moderately in 2017–18 relative to 2016–17, when farm incomes were historically high due to record winter crop production and very high prices for beef cattle. The average farm cash income for broadacre farms across Queensland was $217,600 in 2016–17, falling to $179,000 per farm in 2017–18 — still well above the longer-term average of $130,000 (Table 10 and Figure 11).

In 2018–19 the financial performance of broadacre farms in Queensland is expected to decline further due to lower prices for beef cattle and ongoing drought conditions in the south that are expected to reduce winter crop production in Queensland by 38% between 2017–18 and 2018–19.

Regional differences in farm performance in 2018–19 are expected. Average farm incomes in the Darling Downs and Central Highlands (region 322) and Charleville – Longreach (region 314) are expected to be much lower in 2018-19 compared with the previous year, and considerably worse than 2016–17 (Table 10).

In contrast, northern and north-western regions of Queensland that predominantly graze beef cattle are expected to achieve average farm incomes in 2018–19 similar to or slightly better than the previous year. However, ABARES estimates of financial performance in 2018–19 were based on surveys conducted prior to the major flooding event in northern Queensland in February 2019. ABARES will revise the 2018–19 projections for broadacre farms in Queensland once the implications of the flooding event are clear.

Dairy farms in Queensland are predominantly located in the south-eastern corner of the state, although pockets of dairy farms can be found along the Queensland coast as far north as the Atherton Tablelands. On average, the financial performance of dairy farms in Queensland is expected to worsen considerably in 2018–19 compared with the previous year (Figure 12) due to higher purchased feed costs (increased by around $40,000 per farm) and lower milk production (down 11% per farm) and milk receipts (down $56,200 per farm). Average farm business profit in this industry is expected to be a loss of $100,000 in 2018–19, reflecting a rundown in holdings of dairy cattle in addition to the reduction in cash incomes.

p Preliminary estimates. y Provisional estimates. RSE Figures in parentheses are standard errors expressed as a percentage of the estimate provided.
Source: ABARES Australian Agricultural and Grazing Industries Survey and Australian Dairy Industries Survey

South Australia

In 2016–17 farm cash incomes for SA broadacre farms were the highest recorded in over 40 years, the result of record grain production and strong grain, beef and lamb prices. Lower grain production in 2017–18 resulted in the average farm cash income of SA broadacre farms declining slightly, but still remaining well above the average for the previous 10 years (Table 11 and Figure 13).
In 2018–19 a further small decline in financial performance of SA broadacre farms is projected. Farm cash income is projected to decline from an average of $248,000 per farm in 2017–18 to $214,000 in 2018–19 — still around 8% above the average for the 10 years to 2017–18.

Average farm cash incomes are projected to fall substantially year-on-year in regions affected by drought, particularly the Northern Pastoral region (region 411) and the Murray Lands and Yorke Peninsula (region 422) but increase in the Eyre Peninsula (region 421).
At the industry level, the financial performance of farms in the wheat and other crops industry in 2018–19 reflects a mixture of good performance among crop specialists (including in the southern Eyre Peninsula) and drought-affected performance in the eastern and mid-north portion of the Murray Lands and Yorke Peninsula region (Table 11).

Average farm cash incomes in the sheep industry and the sheep–beef industry are projected to improve moderately in 2018–19 compared with the previous year. Higher prices for wool and sheep are expected to more than offset increases in purchased feed costs.

On average, dairy farmers in South Australia are expected to record a decrease in farm cash incomes in 2018–19 (compared with the previous year) of around 24% (Table 11 and Figure 14). Milk production and milk receipts are projected to increase slightly in 2018–19 (around 2% per farm, on average) but costs are expected to increase more, particularly for purchased feed and fertiliser. Average farm business profit is expected to fall by more than the decrease in farm cash income due to a major turnaround in on-farm trading stocks, which were large and positive in 2017–18 (when farmers built up herds of dairy and beef cattle) but negative in 2018–19 (as farmers are projected to reduce dairy cattle numbers). As a result, average farm business profit in 2018–19 on dairy farms in South Australia is projected to be well below the longer-term average, and only marginally above the level recorded in 2006–07 during the Millennium Drought.

p Preliminary estimates. y Provisional estimates. RSE Figures in parentheses are standard errors expressed as a percentage of the estimate provided.
Source: ABARES Australian Agricultural and Grazing Industries Survey and Australian Dairy Industry Survey

Western Australia

Overall financial performance of WA broadacre farms remained strong in 2017–18, declining slightly compared with 2016–17 but maintaining the trend of high farm cash incomes that began in 2013–14 (Figure 15 and Table 12). Higher grain prices and carry-over payments on grain delivered in 2016–17 mostly offset the impact on farm cash incomes of lower grain production in 2017–18 compared with the record 2016–17 crop. Farm cash incomes were also maintained by higher wool prices in 2017–18.

In 2018–19 the financial performance of WA broadacre farms is projected to increase further as a result of increased wheat production compared with 2017–18, high grain prices (particularly for barley) and higher wool prices. Overall, average farm cash income for WA broadacre farms is projected to increase to $490,000 in 2017–18 — the highest recorded for WA broadacre farms since ABARES commenced the AAGIS survey in 1977–78.

At the industry level, the increased financial performance of farms in the wheat and other crops industry in 2018–19 reflects high grain prices and increased wheat production particularly in the North and East Wheat Belt (Table 12). In contrast, average incomes for mixed livestock–crops industry farms are projected to decline slightly as a result of reduced grain legume and oilseed production and lower turn-off of sheep, particularly for live export.

Average farm cash income for the sheep industry is projected to improve in 2018–19 compared with the previous year. Higher prices for wool are expected to more than offset the effects of a reduction in sheep turn-off.

Regional differences in farm performance are expected in 2018–19. Farm cash incomes are expected to be higher in the North and East Wheat Belt (region 522) and the Central and South Wheat Belt (region 521) due mainly to higher overall crop receipts (Table 12). Increased farm cash incomes are also expected in the beef cattle dominant regions of the Kimberly (region 511), Pilbara and Southern Rangelands (region 512), largely as a consequence of increased turn-off of beef cattle for both slaughter and live export. In contrast, farm cash incomes are projected to decline slightly in the South West region (region 531) mainly as a result of lower prices for beef cattle and increased purchased feed costs.

On average, dairy farmers in Western Australia are expected to record a decrease in farm cash incomes in 2018–19 compared with 2017–18 of around 29% (Table 12 and Figure 16). Milk production and milk receipts are projected to decrease slightly in 2018–19 (by around 1% on average), while costs are expected to increase by around 2%. Most of this increase is due to higher expenditure on purchased feed. Average farm business profit is expected to fall by more than the decrease in farm cash income. This is because farmers are not expected to expand their dairy herds in 2018–19 (on average), so the projected change in trading stocks is close to zero. This is in contrast to both 2016–17 and 2017–18, when increases in dairy cattle numbers led to relatively large positive values for the change in trading stocks, adding substantially to average farm business profit in those years.

p Preliminary estimates. y Provisional estimates. RSE Figures in parentheses are standard errors expressed as a percentage of the estimate provided.
Source: ABARES Australian Agricultural and Grazing Industries Survey and Australian Dairy Industry Survey

Tasmania

Farm cash incomes increased slightly for Tasmanian broadacre farms in 2017–18 (Table 13 and Figure 17) mainly as a result of increased prices for sheep, lambs and wool. Receipts from cereal grains also increased slightly due to higher prices and despite lower production as a result of dry seasonal conditions. An increase in receipts from non-broadacre crops, particularly potatoes, was also recorded.

In 2018–19 the financial performance of Tasmanian broadacre farms is projected to increase further, mainly as the result of an increase in lamb and wool prices and slightly higher beef cattle turn-off (Figure 17).

Average farm cash incomes for sheep industry farms are expected to increase as a result of higher sheep, lamb and wool prices. Farm cash income for beef industry farms is expected to increase as a result of increased beef cattle turn-off.

In 2018–19 increased cereal crop production, higher grain prices and higher lamb and wool prices is projected to result in higher farm cash income for Tasmanian mixed livestock–crops industry farms, on average (Table 13). Reduced planting and production of oilseed poppies is projected to result in lower overall crop receipts for many farms but this is expected to be offset by higher lamb and wool receipts.

Tasmania is a comparative bright spot for the dairy industry in Australia. It is the only state that produced more milk in 2017-18 than it did in 2001–02 when national milk production was at its peak. Tasmania is also the only state where the average farm cash income on dairy farms is projected to increase in 2018–19 compared with 2017–18 (Table 6). The projected increase is comparatively small however, from $282,000 per farm in 2017–18 to $301,000 in 2018–19 (Table 13 and Figure 18). Increased milk production in 2018–19, a small increase in milk price and increased receipts from the sale of cattle are expected to more than offset higher costs, particularly increased expenditure on purchased feed as a result of higher feed grain prices and increased demand due to dry seasonal conditions in Tasmania in mid 2018–19.

In 2018–19 average farm business profit on Tasmanian dairy farms is projected to be lower than in 2017–18, but still strongly positive and well above the average for the 10 years ending 2017–18. Similar to Western Australia, the decline in average farm business profit in Tasmania (despite a modest increase in farm cash income) is caused by year-on-year differences in the absolute size of the ‘change in trading stocks’ component. For dairy farms, the size (and sign) of the change in trading stocks each year largely reflects differences between the opening and closing numbers of dairy cattle on hand. In 2017–18 the change in trading stocks on dairy farms in Tasmania was large and positive, reflecting a build-up in dairy cattle numbers during that year. This added substantially to the size of average farm business profit. In contrast, dairy cattle numbers are not expected to change much (on average) during 2018–19. As a result, the change in trading stocks (and its contribution to farm business profit) is much smaller than in the previous year.

p Preliminary estimates. y Provisional estimates. RSE Figures in parentheses are standard errors expressed as a percentage of the estimate provided.
Source: ABARES Australian Agricultural and Grazing Industries Survey and Australian Dairy Industry Survey

Northern Territory

Financial performance of beef industry farms in the Northern Territory has been strong in recent years. High prices for beef cattle and strong demand for live export cattle in northern Australia resulted in average farm cash income for NT beef farms being the highest recorded in over 20 years in 2015–16 and farm cash income remained high in 2016–17 (Table 14 and Figure 19).

Average farm cash income declined from $1,569,600 per farm in 2016–17 to an average of $1,075,000 in 2017–18. Farm cash income declined due to lower beef cattle prices, reduced cattle turn-off and higher costs because purchases of cattle increased and transfers of cattle onto properties in the Northern Territory increased by entities operating multiple and interstate properties. Purchases and transfers resulted in increased beef cattle numbers, particularly on the Barkly Tableland where a substantial increase in value of cattle inventory and a rise in business profit was recorded (Table 14).

In 2018–19 dry seasonal conditions and sustained demand for cattle for live export is projected to result in increased turn-off of beef cattle from all NT regions and a rise in average farm cash income.

Despite a small reduction in beef cattle prices and higher operating costs (fuel in particular) a moderate increase is expected in average farm cash income in all regions. Higher beef cattle turn-off is expected to result in a reduction in beef cattle numbers in most regions, leading to a decline in the value of cattle inventories and lower farm business profit in all regions in 2018–19 compared with 2017–18.

p Preliminary estimates. y Provisional estimates. RSE Figures in parentheses are standard errors expressed as a percentage of the estimate provided.
Source: ABARES Australian Agricultural and Grazing Industries Survey

Rates of return on capital

Returns from investment in farm businesses have two components — the returns generated as the profit of the farm business, and capital appreciation. Capital appreciation is the increase in the value of the assets used by the farm business, the farm land in particular.

Rate of return to total capital excluding capital appreciation is the return generated from farm profits. To calculate the rate of return on total capital, farm business profit is adjusted to full equity. Interest and rents paid are added back onto farm business profit so that all businesses can be compared on an equal basis, regardless of the financing arrangements in place. This profit at full equity is then expressed as a percentage of the total value of the capital used in the business (land, livestock and machinery).

On average, return to total capital excluding capital appreciation is relatively low for broadacre and dairy farms. The average rate of return excluding capital appreciation for all broadacre industry farms for the 5 years ending 2017–18 was 2.1% (Figure 20). Relatively low average rates of return largely reflect the influence of a high proportion of small farms (Box 2) in the livestock industries (beef and sheep industries). Small livestock farms often have high capital values relative to their capacity to produce agricultural output and lack the scale to achieve efficiencies in the use of labour and capital. Many small farms operate on high value land in the high-rainfall zone, near coastal and urban areas with high amenity value. Small farms did not record positive rates of return excluding capital appreciation in any broadacre industry or in the dairy industry over the 5 years ending 2017–18.

Another reason that rates of return on small livestock farms can be quite low is that the methodology used to calculate farm profit makes allowance for the imputed wages of all family members that supplied labour inputs to the farm during the year. Around 99% of small Australian broadacre and dairy farms are family owned and operated, and use mainly unpaid family labour for their operation. ABARES calculation of farm business profit includes the value of unpaid labour input on these farms to enable the performance of all farms to be compared regardless of the type of labour used. The value of unpaid labour is often a large proportion of total costs on small livestock farms.

Rate of return to total capital including capital appreciation is a measure that includes any appreciation in the value of farm assets, together with the return generated from farm profits. When capital appreciation is included, small farms in all broadacre industries and the dairy industry recorded rates of return exceeding 2.0% per year over the 5 years ending 2017–18 (Table 15).

The average rate of return to total farm capital including capital appreciation for all broadacre farms was high between 2000–01 and 2006–07 but declined after 2007–08 (Figure 20). Strong demand for rural land during most of the 2000s resulted in a sharp increase in land values in most agricultural regions. This raised the total capital value of farms. Rapidly rising farm capital values resulted in high rates of return including capital appreciation. However, from 2007–08 to 2013–14 land values generally did not increase and reported land values declined in several regions, particularly in northern Australia. The reduction in reported land values during this period resulted in estimates of average rate of return to total farm capital including capital appreciation for broadacre falling below the average rate of return excluding capital appreciation.

In 2014–15 and 2015–16 higher incomes for beef industry farms led to small increases in recorded land values in high rainfall and pastoral zone regions, and increases in the value of inventories. The increase in farm capital value added around 3.0 percentage points to the average rate of return for broadacre farms in 2014–15 and around 6.0 percentage points in 2015–16. Further increases were recorded in land values in all zones in 2016–17 following record crop production. The value of sheep inventories (part of livestock capital) also increased.

In 2017–18 the average rate of return excluding capital appreciation for Australian broadacre farms is estimated to have been 1.9%. The average rate of return including capital appreciation is estimated to have been 5.6% for all broadacre farms.

Large farms generate high rates of return

Generally, larger farms generate higher rates of return than smaller farms as a result of increasing returns to scale, greater access to superior technologies and greater management skill (Jackson & Martin 2014).

Very large wheat and other crops industry farms (see Box 2) generated an average rate of return excluding capital appreciation of 8.1% over the 5 years ending 2017–18, compared with 5.4% for large-sized wheat and other crops industry farms and 2.5% for medium-sized farms (Table 15). The rate of return including capital appreciation for very large wheat and other crops industry farms was estimated to be 12.6%.

Very large farms in the beef industry recorded an average rate of return including capital appreciation of 9.2% for the 5 years ending 2017–18. Large sheep industry farms recorded an average rate of return including capital appreciation of 8.6%.

ns Not supplied. Sample too small to provide reliable estimates. RSE Figures in parentheses are standard errors expressed as a percentage of the estimate provided.
Source: ABARES Australian Agricultural and Grazing Industries Survey and Australian Dairy Industry Survey

Farm investment

The capacity of farm businesses to generate income is influenced by past investments in land to expand the scale of farming activities and in new infrastructure, machinery, equipment and vehicles to boost productivity in the longer term.

Expenditure on additions to farm plant, machinery and infrastructure (for example, buildings, yards, dams and fencing) trended upward over the 20 years to 2017–18 at a rate of 2.8% a year (Figure 21) in real terms. Additions of farm plant, machinery and infrastructure increased strongly between 2012–13 and 2016–17. Higher incomes for beef industry farms after 2013–14 resulted in increased expenditure on capital additions, further adding to the steady increase in investment by grains industry farms (wheat and other crops industry and mixed livestock–crops industry).

In the late 1990s and early 2000s the proportion of broadacre farms acquiring additional land (through purchase or lease) was historically high (Figure 21). Increased incomes for grain farms, strong demand for land in general and sustained lower interest rates on borrowings (Figure 22) resulted in increased demand for land and higher land values.

The proportion of broadacre farms acquiring land declined between 2002–03 and 2007–08 — a period of widespread drought and reduced farm cash incomes in eastern Australia. Despite reduced farm cash incomes in many regions, large increases were recorded in land values (Figure 23), particularly in the pastoral zone regions of northern Australia and the high rainfall zone in all states.

Land values declined in the pastoral zone of northern Australia between 2009–10 and 2013–14 when incomes for beef industry farms were reduced by lower beef cattle prices.

Since 2013–14 higher average farm cash incomes for beef industry farms, continued growth in average farm cash incomes for grains and sheep industry farms and sustained low interest rates on borrowings have led to a steady increase in the proportion of farms acquiring additional land and a rise in land values in all states and zones.

Farm debt

Debt is an important source of funds for Australian farmers. It is used for purchasing land and new plant and equipment as well as for ongoing working capital. This is largely because more than 95% of Australian farms are family owned and operated (Martin et al. 2018). Funding by family farms for expansion and improvement is limited to the funds available to the family, the profits the business can generate and the funds it can borrow.

ABARES farm survey data for broadacre and dairy farms indicates that debt to fund land purchases accounted for the largest share of debt on farms, at an estimated 45% of average broadacre debt at 30 June 2018. Working capital debt accounted for 33% of average broadacre debt at 30 June 2018.

In 2017–18 new borrowing for broadacre and dairy farms mostly funded on-farm investment. Around 60% of new borrowing by broadacre farms and 70% by dairy farms was for the purchase of land, machinery, equipment and vehicles or farm development (Figure 24).

In 2018–19 borrowing to cover operating expenses is expected to increase as a result of lower farm cash incomes and a significant proportion of farms in regions affected by drought having insufficient cash receipts to cover cash operating costs.

Farm equity

Family farms in Australia rely on maintaining high farm equity to provide the capacity to borrow to meet cash flow needs during periods of reduced farm income and for new investment. Despite increases in farm debt over the long term, average farm equity for broadacre and dairy farms remains strong because of increases in the value of agricultural land (Figure 25).

The average equity ratio at 30 June 2018 is estimated at 88% for broadacre farms and 80% for dairy farms. Around 82% of broadacre farms and 56% of dairy farms had equity ratios exceeding 80% at 30 June 2018.

For the majority of broadacre farms, farm equity strengthened between 2014–15 and 2016–17. This was owing to a general increase in land values, higher livestock prices and reductions in debt made possible by high farm cash incomes.

National rural indebtedness

Data collected by the Australian Prudential Regulation Authority (APRA) and reported by the Reserve Bank of Australia provides an indicator of trends in aggregate debt since 1964 (RBA 2018). Total indebtedness of the agriculture, forestry and fishing industries (defined by the RBA as ‘rural debt’) to institutional lenders (banks, government agencies, and pastoral and other financial companies) increased rapidly between 2001 and 2009. Total rural indebtedness increased by 77% from $42.7 billion at 30 June 2001 to $75.5 billion at 30 June 2009, in real terms.

a Excludes debt for large corporate farms. b Average per responding farm. c Equity ratio defined as total owned business capital at 30 June less debt as a percentage of total owned business capital. p ABARES preliminary estimates.
Note: Figures in parentheses are standard errors expressed as a percentage of the estimate provided.

a Excludes debt for large corporate farms. b Average per responding farm. c Equity ratio defined as total owned business capital at 30 June less debt as a percentage of total owned business capital. p ABARES preliminary estimates.
Note: Figures in parentheses are standard errors expressed as a percentage of the estimate provided.

A number of factors influenced growth in rural debt between 2001 and 2009. These include much lower interest rates, structural adjustment, intensification of farm enterprises and borrowing to meet working capital requirements as widespread and extended drought conditions reduced farm incomes in the 2000s.

Total rural debt subsequently declined in real terms to $69.4 billion at 30 June 2015, before rising again to $76.4 billion at 30 June 2018. Bank lending accounts for 95% of total institutional lending. Bank lending declined from $68.5 billion at 31 December 2009 to $63.2 billion at 31 March 2014, before rising to $73.0 billion at 30 June 2018.

Distribution of farm debt

Much of the aggregate agriculture sector debt is held by a relatively small proportion of mostly larger farms. At 30 June 2018 around 70% of aggregate broadacre debt was held by just 12% of farms. On average, these were large farm businesses. In aggregate, these farms produced around 50% of the total value of broadacre farm production in 2017–18.

Nationally, around 41% of grain industry farms and 34% of dairy farms carried more than $1 million in debt at 30 June 2017 (Table 17). In contrast, 66% of beef farms and 57% of sheep farms had debt of less than $100,000 at 30 June 2017. Many of these are small farm businesses.

Aggregate debt is slightly less concentrated among larger farms in the dairy industry. Nevertheless, around 70% of aggregate dairy industry debt at 30 June 2018 was held by 30% of farms.

Debt serviceability

The decline in interest rates, and more recently the strong increase in incomes between 2010–11 and 2016–17 for broadacre farms, reduced the burden of servicing debt and increased the rate of debt repayment.

The average proportion of net income needed to fund interest payments declined for grains and beef farms before increasing slightly in 2017–18 (Figure 26). A further increase is projected for 2018–19 — financial pressure is expected to increase more on farms in drought-affected regions.

For the sheep industry, the proportion of net income needed to fund interest payments in 2018–19 is also projected to remain historically low, at around 12%. Farm cash incomes for sheep industry farms in 2018–19 are projected to be the highest recorded in more than 20 years.

For the dairy industry, debt serviceability over the past 20 years has been affected by frequent years of low farm cash income resulting in a high proportion of net income consumed to fund interest payments. At the national level, the proportion of net farm income needed to meet interest payment is projected to increase to 39% in 2018–19, above the average for the previous decade of 35%.

Further information on the difficulty of servicing debt for the agriculture sector, including information on debt in arrears, is provided in data collected by APRA published by the Department of Agriculture and Water Resources in the publication Agricultural Lending Data (Department of Agriculture and Water Resources 2018).

BOM 2018, Water information dashboard, Bureau of Meteorology, Canberra, accessed 20 February 2019.

Department of Agriculture and Water Resources 2018, Agricultural Lending Data 2016–17, Canberra, October.

Jackson, T & Martin, P 2014, Trends in the size of Australian farms, in Agricultural commodities: September quarter 2014, Australian Bureau of Agricultural and Resource Economics and Sciences, Canberra.

Martin, P, Levantis, C, Shafron, W, Phillips, P & Frilay, J 2018, Farm performance: broadacre and dairy farms, 2015–16 to 2017–18, in Agricultural commodities: March quarter 2018, Australian Bureau of Agricultural and Resource Economics and Sciences, Canberra.

RBA 2018, Rural debt by lender–D9, Reserve Bank of Australia, Sydney, accessed 20 February 2019.