Tom Jackson, ABARES: Farm performance - making the most of a good year
TOM JACKSON: I'm here today to tell you about our latest farm-performance statistics in this great year we have just had and also offer some thoughts on innovation, the theme of our conference this year. So starting with our broadacre sector, which is the grain-fed, grazing, and cropping industry, this time last year we were predicting record farm cash income based on high beef prices and solid winter grain production.
Well, it looks like this forecast eventuated, but the record doesn't seem likely to stand for very long because we're on track for another record this year, driven by record winter crop production and ongoing strength in cattle prices. On average, broadacre farm cash incomes are expected to be $216,000 a farm in 2016 and '17. I think it's worth just spending a minute looking at this figure because records don't get broken all that often, but they're getting smashed here.
And I think what this tells us is that Australian agriculture is a strong and resilient sector for the farms that are innovating and investing and getting better at what they do. And this is an important point because we often hear about relatively bad times in agriculture or how farms aren't attracting enough investment. Or they're being strangled by red tape. But really, what this shows us is that the sector is as strong as it's ever been and that when good conditions come along, farms are able to seize the opportunities that are there.
That said, it's a big country with lots of variation, and we know that not every farmer has had a great run lately. But we also know that even when conditions aren't that great, Australian farmers have a proven capacity to adapt and remain competitive in global markets. When we separate the broadacre sector into its three major components of beef, sheep, and cropping, you can see that farms in all three of these sectors have had a great run in the past few years.
Cropping farms continue to perform particularly well, and we'll hear more about the record grain harvest we've just had later on today. And you can find out more about the really strong growth in profits in this sector since the end of the 2000s in the climate session. But it's not just a cropping story.
Livestock farms are also doing as well as they have in the last 25 years, partly because of good seasonal conditions, and also because prices are up, and not just for beef. What we can see here is that beef prices have had a great run lately, nearly doubling in real terms over the past three years to levels not seen since the late 1970s. However land prices have also been growing strongly, up by almost 50% over the past four years, and offer a substantially higher base than beef prices. So when you add in relatively high wool prices, which is the red line, this helps to explain why sheep farm returns are as high as they've been in at least 25 years and why sheep farms are continuing to do about as well as beef farms, even during this real boom in cattle prices.
However it's not all smooth sailing. In the dairy industry, we can see that low prices continue to put downward pressure on farm profits. And I think this figure sort of shows that the milk price has quite a lot to do with how much dairy farms earn. But climate conditions are also really important through the effect that they have on the amount of pasture that's grown and through the effect it has on the total cost of big inputs like purchased fodder and irrigation water.
So overall, dairy farm cash incomes are expected to be $105,000 a farm on average in 2016-17, which is about 13% below the 10-year average. So when we look to the future as Peter was saying this morning, we're not expecting prices for a range of commodities to increase by very much in the coming years. And so this means that growth in profits from here will need to come from improving efficiency or cutting costs. And these aren't new things to farmers in any industry, but they're certainly easier said than done.
Getting back to the broadacre sector, when we look across the states we can see that, like last year, farms in most states are expected to do better than the 10-year average in 2016-17. There are detailed descriptions of the results by state and by industry in the paper which is in your conference pack. But in summary, farm cash income is the highest its been in at least 25 years in all states except Tasmania. And even there, they're above average, just by less than they were last year.
So we've had some pretty good seasonal conditions in the past year. You've probably seen something like this map before. And what it shows is that we had well above average or record rainfall across much of Southern and Eastern Australia and, indeed, other bits of Australia as well during winter and spring last year. This contributed to the record grain harvest, and it also helped to sustain those high livestock prices as it boosted demand from restockers.So given this, I thought it would be interesting to have a look at how farmers make the most of conditions like these.
Making the most of good years is one of the keys to successfully managing a farm in Australia because, as the old saying goes, there will only be a couple of good years in every 10. And you need to make the most of those to generate the reserves of equity and cash and fodder to get through the years when things aren't so good. And when we think about the future, it's possible that making the most of good years will become more important than it is now because things like climate change and increasing competition from farmers in other countries could well mean that really good years come along less often than they do now.
So what do we know about what the best farms do when good seasonal conditions come along? When we look at the top and bottom performing farms in the cropping industry, what the data for 2016-17 shows us is that the top performers didn't really change what they were doing all that much compared with previous years. These farms appear to have relatively fixed production systems, and they consistently apply a relatively high level of inputs.
So when a good year comes along, they're not trying to make up for a deficit in fertiliser. They're not trying to control a serious weed problem. They can just stick to their system, keep cost under control, and benefit from high yields.
In contrast, the bottom-performing farms seem to try and chase the season a bit in the sense that their inputs increase quite significantly in a good year. And we know that they change their mix of outputs quite a lot as well. So by doing this, they do get higher yields, but their costs increase by even more. And as a result, their rates of return on average are lower. So I thought that was actually quite an interesting result from our farm survey data. And it wasn't what I was expecting to see, which I think really highlights one of the benefits of having a survey like this one.
Another good thing about good years is that they allow farmers to grow their wealth. As you can see, the past couple of years of high incomes have helped farmers to increase their equity really for the first time since the end of the 2000s. Of course, land price growth during the early 2000s helped farmers to grow their wealth quite a bit faster. But during a period when land prices haven't really done a lot, high profits are about the only way farmers have to grow their wealth over time.
And the last thing I wanted to say about making the most of a good year is that management skills are probably the biggest driver. In particular, those farmers with the greatest ability to spot an opportunity when one comes along, willingness to take a risk, and the skills to consistently get the details right are going to be the ones that do best over time. Now unfortunately, like many aspects of farm management, we actually don't have much to say about why some farmers are better at this than others.
It's not particularly well correlated with education or experience or age or those sort of normal predictors that we use. And so that suggests that it is an innate characteristic, largely, that some people just have more than others. That said, the best performing farms are those with the most competitive and efficient production systems. And a lot of this comes down to the technology being used on farms, which, of course, brings me to the theme of our conference this year, innovation, because this is the process that delivers new technologies and knowledge to farmers.
So very broadly, in economic terms, we can think of innovation as having sort of two types. One top increases revenue, and the other type reduces costs. I'll start with the cost-saving ones.
On this slide, we've got the non-land shares of total inputs used by cropping and beef farms. And as you can see, there are some big differences. Cropping farms use relatively large amounts of materials and services in production, and beef farms use relatively large amounts of labour. We don't need to focus too much on the exact numbers. The point is that if you're trying to save costs, then innovations that reduce the use of your biggest or most expensive inputs are going to be where the greatest benefits are found.
So, for example, on cropping farms there have been a stream of innovations over the years that have helped to reduce the cost of fertiliser. This includes applying it at variable rates across paddocks, depending on soil type and the existing availability of nutrients. And fertilisers are now also often applied in liquid form, beneath seeds, where it will be used as the crop grows. And so less is lost to the atmosphere.
Looking to the future, nanotechnology is likely to mean that new and different fertilisers are developed that are more efficient and can continue to reduce that overall fertiliser cost. In the beef industry, many innovations have sought to reduce the number of hours required to raise cattle. This includes really well-known things like using motorbikes and helicopters in place of horses. And more recently in Northern Australia, a satellite-based pasture measurement tool is being rolled out that allows farmers to judge the amount of feed available on particular areas of their properties without having to drive for hours to get there. And in addition to that, connected devices like weighing equipment at water points can tell farmers about the condition of cattle without needing to go out there, find them, round them up, and weigh them.
So when we look at the horticulture and dairy industries, this is what we see. Lots of labour is still used on horticulture farms, and this isn't just in the form of directly-hired labour, but also through service providers. So some of that light-blue triangle for horticulture farms is also labour. Dairy farms also use quite a bit of labour, certain when compared with the broadacre farms, but they also use quite a lot of materials and services.
So we can expect that cost-saving innovations in these industries will also probably focus on labour saving. And there are some exciting innovations that we're seeing in both of these sectors at the moment. So, for example, in the vegetable industry, a number of groups, including some in Australia, are developing robots that can do a variety of tasks on farms.
This includes pruning vines or picking fruit. There's even one really cool one that drives along and can sense or detect an individual weed amongst a crop of some other plants. And then it'll zap it with a laser or a chemical.
On dairy farms, we also see greater use of automation. So a lot of new dairies incorporate a feeding system that recognises individual cows as they walk into the dairy and allocates them a ration of feed that's sort of designed for their individual needs. This helps to save the amount of labour required for feeding cattle, but it also helps to reduce that large materials component by giving cattle the most efficient mix of feed possible.
There are also fully-automated dairies which theoretically do away with the need to get up at 4:00 in the morning and therefore save farmers quite a lot of time. And while these are still really expensive compared with the benefits that they generate, we can expect that to change over time as more research and development is done.
So in terms of revenue-increasing innovations, there are a number of possibilities. The first thing is that increasing yields is an important aspect of innovation in all industries. It's something that generally happens very slow, or in this case not so slow, genetic improvement in plants and animals. You can also improve yield through improvements in knowledge. So, for example, new pasture management methods allow farmers to carry more stock per hectare now than they could in the past.
New products can also increase revenue. These are pretty rare in agricultural. After all, people have been farming for quite a long time now. But occasionally, something new to Australia comes along. Chia, for example, is now being grown in Northern Australia.
It is also the case that new crops to particular areas of Australia come along as technology improves. So, for example, cotton is now being grown in Southern New South Wales, rather than only in the north. Another important way to increase revenue is to improve the quality of existing products.
So, for example, grass-fed meat is often marketed as healthier, as are various superfoods. To the extent that these products are worth more to consumers than alternatives, then prices for them may be higher. A big part of the quality story is product differentiation, and there are a number of products around at the moment that allow food and fibre products to be traced all the way through the supply chain, giving consumers more information about the safety and quality of those products and information about other characteristics like animal welfare or environmental effects.
And these innovations such as the QR Code we've got here, these could be really helpful for Australian farmers to demonstrate that their products are cleaner and greener or have whatever other characteristics they're selling than other farmers. Farmers in many other countries make exactly the same claim, and consumers are increasingly demanding evidence. The last thing I wanted to say about these revenue-increasing innovations is that a lot of them don't take the form of a new product or a new machine at all, but are instead improvements to knowledge. This might be more knowledge about how to maintain soil health. Or it might be how to interpret a new seasonal weather forecast, or it might be something much more general about improved financial management skills.
So overall, we can't be sure what innovations the future will bring. But we do know that there are thousands of researchers and entrepreneurs out there, constantly trying to develop new products, and that as a result there will be an ongoing flow of new ideas for farmers. For farmers to benefit from these new ideas, they need the skills to identify opportunities for innovation, to evaluate how much to invest in them, and then develop the skills required to get the most out of them.
This is something Australian farmers have a great track record in doing. We have every reason to think that it will continue into the future. Thank you.
[APPLAUSE]