Why Agriculture?

Presentation to Farmer Bestwool Group, Seymour

Geoff Daniel
November 2013

FARMING PHILOSOPHY
For whatever reasons we farm, and I am sure these reasons are as numerous as there
are farmers, it seems clear to me that we must farm profitably. Besides the obvious
reasons to do with provision of the essentials for our families food, clothing warmth,
education it seems to me that we owe it to future generations to farm profitably now.
If we cannot farm profitably we will not be an attractive destination for capital, and it
will leave (and has left) our industry. Good examples of the effects of the inability to
farm profitably and competitively include the overrunning of our landscapes with the
radiata and the blue-gum weeds. The less obvious but more insidious effect is the
widespread running down of infrastructure, pastures, and skills that we have seen in
the grazing industries over the past 20 or so years.
Agriculture is not sustainable without outside input - energy, replacement nutrients,
new technology, research and development, education or whatever must be purchased.
To think otherwise, as the crazier end of the green movement, and some rather naive
farmers seem to do, is simply dumb. If we are to sustain our businesses and our
industry we must have profits, from which we can draw funds to reinvest and to reward
the providers of capital that have made that profitability possible. We must be
attractive as a destination for capital. We must be profitable.
So, I say; forget the touchy feely guff about sustainability peddled by the diverse range
of prophets out there. We must farm profitably and in a way that produces risk and
return competitive with other industries. Without this simple prerequisite, capital will
flee from us and our industries will not survive.
And what does this mean?
It means that farm businesses must be continually assessing and integrating new
technologies into their production systems.

It means that managers and their advisors need the skills to adopt an evidence and
systems based approach when making decisions.
It means that we must continually strive to be producing whatever commodity we are
involved in at an acceptable quality and the lowest possible cost.
It means that we must not block the flow of capital needed to be invested in our
industry for the gains to be made that will ensure our survival.

CURRENT TRENDS
On the farm
I spend a lot of time driving around the bush, and quite frankly, it can get depressing.
I see too many old farmers, farmers that have given up, farmers that dont have the
skills to utilise their resources.
I see too many young farmers that have not been able to throw off the bad habits of
their fathers and grandfathers.
I see a huge gap in performance between farmers that are similar in terms of scale,
age, location etc.
I see too many farms that are too small to be viable, or so run down and burdened by
debt that they have no chance of becoming viable businesses under their current
ownership and/or management.
I see desperate farmers using range of silver bullets from a range of providers across
the full spectrum from the just plain incompetent through to complete shonks. We have
run our skills base down to a level that a substantial proportion of farm managers do
not have the skills to differentiate between useful and just plain bad advice or products.
Running parallel to this I see very attractive returns being generated from the adoption
of best practice techniques on farms, and I see farming businesses run by welleducated and committed farmers that are producing returns competitive with other
asset classes.
How can this gap be bridged? My view is that there is a clear need for a massive
change in the ownership and management structure of the industry.

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Off the farm

I also spend time in the city, and there I see real interest in agriculture from a business
point of view. Agriculture is finally on the radar of the managers and owners of large
lumps of money. We are becoming recognised as an asset class, and as a viable
destination for capital. This is a major change in attitude in the investment community.
This change in attitude is being driven by:
A growing acceptance within the investment community that the there is
substance in the argument that growth in previously third world countries such
as China and India will lead to a massive demand for agricultural produce.
Increasing concerns in many wealthy countries, particularly in Asia and the
Middle East, that both food security and food quality are major issues.
A general acceptance that the debt fuelled super returns of the previous decade
were not and are not sustainable. There is a preference for real assets, producing
a product of fundamental value to consumers, who after all, in the long run, drive
the economy.
There is a belief that the long term trend of falling prices for agricultural commodities
has reversed, and managers of capital are increasingly prepared to back this judgement
with investment dollars.
I am not sure if I agree with them about price trends - I have always considered the long
term downward trend in commodity prices to be one of the great certainties of life.
However perhaps there is something in it. Certainly both lamb and grain prices have
maintained their real value for the last 20 or 30 years. Maybe Malthus was right after
all. Quite frankly though, I dont think that it matters much whether real prices are
going to rise or not the fact is that if we strategically focus on producing at low cost
we can have a good business and a profitable industry.
So, amongst the doom and gloom I see opportunity.

GROWTH FARMS

I have been farming on my own account since 1984. For the first 15 years of this period
I concentrated exclusively on increasing the productivity and profitability of our family
business. The financial results from this were satisfactory, and it became increasingly

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clear that there was an opportunity to implement a similar farming philosophy on a

much larger scale than was possible locally.
To this end, with some likeminded partners, we formed Growth Farms a business that
provides professional farm management services to the rural industry. The key
characteristics of this business are:
We are Farm Managers
Assessment, acquisition, implementation and reporting are our core skills
Professionalising management
Evidence based science is crucial to us
Productivity gain is central to our strategy
Remuneration is based on profitability
Currently businesses controlled by myself, my family and my various partners and
Growth Farms control well over $400M worth of agricultural land, plant and livestock
spread over the higher rainfall areas of eastern Australia, with an annual turnover of
around well over $50M.

THE LOCAL SCENE

Tumbarumba shire contains 136,000 hectares of farming land. Of this, 124,682

hectares is used for the grazing of beef cattle, wool or meat sheep.
These farms consist of an estimated 263 businesses, with an average grazed area of
474 hectares running about 4,000 dry sheep equivalents (DSEs), stocked at a rate of
8.6 DSE per hectare.
The gross income from these farms during 2010-2011 was $33.6m or $128,000 per
business, or $31.40 per DSE.
Grazing farms are clearly a very important source of income to the shire.
Figures taken from my own businesses and from reputably benchmarked farms would
indicate that a gross income of $40-50 per DSE was achievable during that year. My
businesses, covering 10,000 hectares, and I would think being reasonably
representative of the land in the shire, carry an average of 15-16 DSE per hectare.

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Some quick sums indicate that there is the potential to increase the agricultural income
coming into the shire by $40-50M, or well over double the current income. Imagine if
this could be realised!
This is not an issue unique to Tumbarumba shire. If similar figures were calculate for
any number of shires the figures would be similar.
Why is this? I think that it is simple:
Farms are too small
Farm managers are too old, undereducated or undercapitalised.
And what is the solution? Farms need to be aggregated, infrastructure and pastures
need to be recapitalised and management skills need to be reinvigorated.

THE FUTURE

Unlike the past, which is often a very is a pleasant place to be, the future is an unknown
country a very scary place indeed. I hesitate to predict anything, however I think that
there are some prerequisites that if put in place, will give us the best chance of recreating profitable farm businesses and a vibrant agricultural sector.
We need smart well educated people to manage farm enterprises. To attract them to
the industry they will require career paths and reasonable remuneration.
We need high level, post graduate training in evidence based approach for these people
and for all of the support people that are part of a healthy industry; scientists, advisors,
agribusiness executives etc.
We need the capital to be invested in farming businesses to allow the increases in
productivity that are possible. This capital can be in the form of either debt or equity.
Well designed and implemented farm productivity improvement programs can have
returns much higher than the costs of the capital required to enable them. My
experience is that returns from these programs can range from 20% to 100s of percent.
However, there is risk involved and it is unlikely that debt can provide all of the capital
needed by the industry. We need new sources of equity to enter the industry.
And we need scale in farm businesses. Greater scale means that we can spread
management over more productive units, pay managers more appropriately, and
provide real career paths for bright, well educated, ambitious young people. We are

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currently going through a period of re-aggregation of farm businesses. This process is

overdue and must be allowed to run its course. Barriers to the growth of farm
businesses such as interest subsidies need to be removed so as to allow the creative
destruction of the market place to do its work.
Currently there is much hysteria regarding foreign ownership of farming businesses. If
this hysteria has the effect of slowing or stopping the re-aggregation and
recapitalisation needed by farming businesses it will be a disaster for Australian
agriculture and rural communities in general. There is plenty of evidence that foreign
investment has underpinned the Australian economy for the past 235 years, and there
is little rational reason to believe that threats from its utilisation are greater than the
threats from its rejection.
My own family used the wealth gained from the sugar trade in the West Indies to
finance the industrialisation of cotton spinning and weaving industries in Scotland, and
in turn sent this capital to Australia where it was used to help develop the grazing
industries of Western Victoria and Queensland. Where would Australia be without this
influx of British capital? The rise of Asia would seem inevitable and it is our choice
whether we adapt and interact on equal terms, utilising their capital to mutual benefit,
or if we follow a different path.

WHAT CAN GOVERNMENT DO?

I would say in a day to day sense; not much, and as little as possible. Get out of the
way may be a realistic request. In the medium to longer term there are real structural
impediments to change that government does have the power to influence.
These would include:
Removal of impediments to the re-aggregation and re-capitalisation of Australian
farm businesses.
Areas to consider:
The effect of subdivision rules
Interest subsidies
Fodder subsidies
Other RAS benefits

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 Provision of advisory services and compulsory disease control programs

Restriction of foreign investment
Provision of infrastructure
Roads
B double access
Telecommunication access
Education

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IN CONCLUSION
I like farming.

In particular I like farming profitably. It is a worthwhile vocation, but it is not a hobby. If

the world is to be fed and clothed farming must be done profitably, both now and into
the future.
To be done profitably it must be done by well capitalised farm businesses, utilising the
skills of well educated and highly skilled managers.
Currently a large proportion of farms are too small or too poorly capitalised to access
the skills and capital required to transform them into viable businesses. The current
trend towards aggregation of management and ownership should go some way towards
allowing the evolution of business structures better suited to the modern world.
Take a deep breath, it will be an exciting ride, but for those with the right skills and
attitude it will be a rewarding one.

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