SIBI new on-farm technology economic case study: laneways
Case study:Slade family of Glenridge Park, Mount Barker
Owners: Andrew and Nicole Slade, Lyn and David Slade, and Vanessa and Scott Hillman
Property location: 20 kilometres (km)northwest of Mount Barker
Property size: 5000 hectares (ha)
Stock: 6500 Greeline composite ewes for prime lamb production, 700 cattle
Cropping: 2500 hectares
Average annual rainfall: 500 millimetres (mm)
Is it worth constructing a laneway system through the farm? A well-constructed laneway system simplifies moving both livestock and machinery through the farm, but it costs a lot to establish and you lose otherwise productive land. Andrew Slade, who farms with his wife Nicole, parents David and Lynn, sister Vanessa and brother-in-law Scott at Kendenup near Mount Barker in the Great Southern region of Western Australia (WA) wanted to know if his laneway system was a worthwhile investment.
The Slades farm 4500ha with half the farm cropped while the balance is run to cattle and sheep. They have constructed an extensive laneway system through the farm with 40 kilometres of laneways. The laneways have been built to provide all weather access in an area where without them they would have limited access through most of winter. All the laneways are fully gravelled and graded twice a year with culverts for all weather access taking them to the equivalent of a well maintained shire gravel road.
The laneways on the farm are built with an average width of 15 metres and fenced on both sides. All weather access is important at Kendenup as they can lose access for up to four months each year so the laneways are gravelled with culverts to ensure they can be accessed at any time. If they had to start again today, the Slades believe the laneways would cost around $8000 per kilometre, being $3000/km to construct the roads, $4000/km for the second fence and $1000/km for the all-weather access. With good fencing on the existing paddocks, they don’t value the second fence but if required it would increase the cost to around $12000/km. If built today, the total cost for the laneways would be $320000 across the whole farm.
The laneways are graded twice each year, costing $100 per kilometre or $4000 for the whole farm as they own their grader and have gravel available as well. The 40 kilometres of laneways has taken 60ha of productive land out of the farm losing $300/ha in lost profit or $18000/year.
There are several benefits of having the laneways. First, both the utes and trucks travel a lot on the laneways, with Andrew driving the ute at 80km per hour and truck at 50km per hour on the laneways against 40km per hour in the paddocks for the ute and 25km per hour for the truck. Secondly, with a good laneway system they open less gates, and often though not always the case, livestock can get back to the paddock unassisted. With it taking a full minute to slow down, open a gate, drive through, close it and get back up to speed again, less gate openings are a real benefit. Finally, laneways cause less damage to vehicles than driving through the paddock and while it doesn’t stop depreciation or lower interest costs, the laneways save around 6cents/km in fuel, repairs and tyre savings.
Through the year, the Slades use the laneways for around 48000 kilometres, twice a day inspecting the farm, feeding the sheep and cows over summer, moving machinery during the cropping program and finally for moving the sheep and cattle to and from the yards (Table 1). Without laneways this takes around 2500 hours or over a full time worker’s labour every year. With the laneways the time taken falls to around 1200 hours. With faster travel time through the farm, the Slades are able to save over 1300 hours a year in labour alone, worth $60000, more than half a full time equivalent worker on the farm.
Table 1 Total laneway use on the Slade farm including time taken
Activity / Distance(km) / Laneways
(hours) / No laneways
(hours) / Time saved
(hours)
Daily farm inspections / 29,200 / 731 / 1460 / 729
Sheep and cattle feeding / 11,100 / 222 / 474 / 252
Sheep and cattle mob moving / 528 / 163 / 352 / 189
Cropping work / 6800 / 121 / 242 / 121
Total / 47,628 / 1237 / 2528 / 1323
Andrew believes the laneway system will last for 50 years before being obsolete. To determine if the laneways are worthwhile, a Net Present Value (NPV) analysis of the laneways was undertaken. An NPV looks at all benefits of the laneway system across its life and then deducts the expenses. Both income and expenses are worth less than the current value, so these are converted into today’s dollars. A simple way to think of this is to think of a friend asking to borrow $100 from you. If they pay you back tomorrow, you’d probably say just pay me back the $100. However, if they needed to borrow it for a year (this is depriving you of the money), you might say that you also need to be paid for not having access to the funds for the year. The NPV calculation factors this in for the full life of the investment.
Because the NPV factors in a time value of money calculation, if the result is greater than zero, then the investment is worth making. If the NPV is negative or below $0, then you would be better off not investing in the system. Over 50 years and with the investment cost or discount rate set at 6%, the laneways system cost $320000 but returns $528000. This means the laneways generate $528000 in value after paying off the initial investment.
Another way to look at the investment is to look at the benefit cost ratio (BCR) of the investment. The BCR looks at the value of investing $1 in the laneways over their full life. The BCR for laneways on the Slade farm is 2.6, meaning it returns $2.60 for each dollar invested.
On a simple payback comparison, the laneways pay for themselves after seven years, meaning the cash savings exceed the investment cost after seven years.
The effective life of the laneway has a significant impact on the return from the laneway investment. While the Slades say the laneways will last 50 years, potentially they could sell the farm earlier, passing on the investment value to another farmer, or there may be a disaster that destroys it earlier. Table 2 below shows the effect of changing the effective life of the laneway from 10 years where they break even at 60 years and the laneways return $2.80 for each dollar invested. With the laneway saving over $60000 each year, if the laneways last more than 10 years, it is worth doing and this keeps increasing until either the laneway system needs to be fully replaced or the farm is sold.
Table 2Impact of changing the life of the laneway system
Effective life of laneway / 10 / 15 / 20 / 25 / 40 / 50 / 60Net present value ($) / 8000 / 124,000 / 219,000 / 298,000 / 461,000 / 528,000 / 573,000
Benefit cost ratio / 1.0 / 1.4 / 1.7 / 1.9 / 2.4 / 2.6 / 2.8
Years to payback / 7 / 7 / 7 / 7 / 7 / 7 / 7
The analysis on life time value above assumes a discount or investment rate of 6%. This is the rate that a farmer expects to receive from investing a dollar, meaning for each dollar invested the farmer expects a return of 6 cents each year. In WA, farmers have generally accepted a return within the range of 5 to 9%, capitalising any higher returns into greater land values. Over a 50 year investment, if the Slades are willing to accept a return of only 5% then the BCR increases to 3.2 times, while requiring 9% on their funds reduces the return to 1.7 times (Table 3).
Table 3Impact of changing the expected return on a laneway investment
Discount rate (%) / 5 / 6 / 7 / 8 / 9Net present value ($) / 696,000 / 528,000 / 400,000 / 303,000 / 227,000
Benefit cost ratio / 3.2 / 2.6 / 2.3 / 1.9 / 1.7
Years to payback / 7 / 7 / 7 / 7 / 7
The discount rate is important because it sets the rate at which you can get a better return elsewhere. If you are willing to accept a return of only 5%, then more investments are profitable but as the discount rate becomes higher the hurdle to invest gets higher. Going back to the example earlier, if your friend was borrowing the $100 and had to pay back $5 in interest next year, they’d probably say yes, but if the discount rate was 100% meaning they had to pay back the $100 plus another $100 in investment costs, they’d probably pass (and you might lose the friendship as well).
Spending more up front requires a higher return later to make any investment work. The Slade family do a lot of the work themselves and have built the laneway system on the farm for $8000 per kilometre or $320000 for the whole farm. Increasing the construction costs up to $12000 per kilometre ($480000), the system is still profitable (Table 4).
Table 4Effect of construction cost on return on laneways
Cost/km to establish ($) / 6000 / 8000 / 10 000 / 12 000Initial investment ($) / 200 000 / 320 000 / 320 000 / 380 000
Net present value ($) / $603 000 / $528 000 / $452 000 / $377 000
Benefit cost ratio / 3.5 / 2.6 / 2.1 / 1.8
Years to payback / 5 / 7 / 8 / 10
The Slades use the laneways a lot and other farms might use their own systems less. The Slades travel across the whole laneway system effectively twice a day, but if this is halved there is a much larger impact on the return. Reducing the farm inspections by half drops the value of the investment from $528000 to $192000, which is still worth making but a lot less compelling. Similarly if they reduced the feeding time from four months to three months, the laneways are not as profitable but the decline is smaller, falling to $466000 (Table 5)
Table 5Impact of less use of the laneways
Measure / Base case / One farm inspectionper day / Reduced feeding at
90 days
Net present value / $528,000 / $192,000 / $466,000
Benefit cost ratio ($) / 2.6 / 1.6 / 2.5
Years to payback / 7 / 11 / 7
Conclusion
Farming is all about efficiency; looking to do more with less in a faster way.
Laneways have been around for a long time, but is one of the most efficient labour saving devices on a farm. The Slade family have invested in a 40 kilometre laneway system through their 4500ha farm costing around $320000 in today’s dollars and lost around 60ha in land as well. But the savings are significant, as the laneway system allows them to drive twice as fast and open fewer gates.
On the Slades’ farm, they save around 1300 hours each year in labour, more than half a full time worker’s wage on the farm each year. The savings equate to over
$60000 a year. Over the 50 years the Slades expect the laneways to last, the benefit is $528000 or $2.60 for each dollar invested. With large annual savings from the laneway system resulting in higher efficiency, each year the Slades can get out of the laneways makes them more profitable. On their farm the system breaks even at 10 years.
Because laneways are such a long term investment, the expected return has a large impact on the result. With most farms accepting a return on investment of 5-9% each year, the system is profitable at all rates, with a BCR between 1.7 and 3.2 for the 50 year investment.
The labour saving and vehicle efficiency benefits of laneways make them an investment all farms should consider either to reduce their labour costs, or more likely to use the labour somewhere else on the farm. While the upfront costs are significant, the returns are worth investigating. Start by looking at what you do across the farm and how much your time is worth. The savings can be significant.