Thursday, April 25, 2024

Farm incomes walk climate tightrope

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Australian ag returns at their most volatile ever thanks to price and climate swings.
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New Zealand farmers are not alone in facing the challenge of striving for value while mitigating their environmental footprint. Senior reporter Richard Rennie is in Australia to find out how our neighbours are approaching the issues of gene technology, carbon farming and sustainability.

Compounding levels of risk around climate impact and price fluctuations over the past 30 years have pushed Australian farm income volatility to an all-time high. 

Work by Dr Neal Hughes, senior economist with the Australian Bureau of Agriculture and Resources (ABARES), has highlighted the impact price and climate variables have had as global commodity markets have become more uncertain.

For a typical Australian livestock property, that variability now encompasses a vast range of returns from between 150% above a median year to 125% below, when price and climate impacts are combined.

That level of variability might confound many New Zealand farmers, but their Australian counterparts have dealt with it by holding historically low levels of debt to equity on their farm businesses.

“Farms typically have a low level of debt and high equity in response to the risks price and climate bring, with equity rate of about 90% varying relatively little over time,” Hughes said.

What Australian farmers have experienced in the past two to three years is an unprecedented further rise on paper of their equity levels, driven by substantial increases in rural land values, while debt has remained relatively static.

This has equity ratios at their highest point in the past 30 years. In 2022 the average livestock farm debt was only A$220,000 ($236,000), less than an average property’s annual revenue.

“So, farmers have been managing that risk by not taking on a lot of financial risk.” 

While this outwardly makes sense, it has also placed a constraint on investment, and on the ability to capitalise on potential productivity gains through that investment.

Australian on-farm productivity enjoyed a golden period of gains through the 1990s to early 2000s of about 2.4% a year, but this has plateaued lower at .6% a year in the past decade.

“Insurance (against climate) would be a clean solution, but we are a long way from solving the problem of viable insurance for the likes of drought,” Hughes said.
He said there was a role government and wider industry could play in planning for the level of events experienced in the past decade, which have ranged from extreme flooding to severe drought and back to severe floods in parts of Australia.

This would include work done on a national drought early warning system, running Australian Bureau of Meteorology (BoM) data through ABARES farm models, giving predictions down across a 5km-wide grid system that will ultimately be available publicly online.

The BoM came under some criticism this summer after predicted dry El Niño conditions did not materialise as widely as expected. 

Hundreds of thousands of head of livestock, particularly sheep, had been offloaded in anticipation of a dry summer, sending local and export market prices crashing and taking the likes of NZ’s China lamb market with it.

Hughes said the BoM had been relatively open ended on what the summer would look like, and the outcome was within the range offered earlier on.

“I tend to think it may really have been more of a communication issue. The BoM has been thrown under the bus a bit.”

He said there is always a challenge for the BoM looking three months out for a seasonal forecast, against farmers’ shorter term focus.

He also pointed to Australia’s Future Drought Fund, which is now in its next funding phase and helping to make rural communities and farm businesses more resilient to future events. 

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