Something that is often overlooked in farming businesses is ‘the margin’. Like any commodity, farm produce, be it beef, lamb, wool or grain, is produced and sold in the interest of achieving a ‘margin’. There are two sides to the ‘margin’ equation: the cost of producing the product, and the price received for it. The difference between the two is the ‘margin’ and unfortunately, it is very slim in agriculture.
It is in fact so slim that some farmers don’t quantify whether their margin is a negative or positive figure. The accountant doesn’t understand the production side of the business and is restricted to cashflows and profit and loss statements (no consideration to on-farm production inventories) and the banks will keep lending money while ever there is enough equity in the system to recover principal and outstanding interest should they need to withdraw from the arrangement.
Those involved in the cattle industries class action against the Australian government will need to consider this issue, and many more, in its efforts to seek compensation for the temporary loss of the live-export market.
For instance, one may wish to claim for loss of income from unsold cattle. But those cattle did not disappear, they probably stayed on-farm, growing the inventory size and value of that farm in that year. Was the farm running at optimal stocking rates? If so, did the forced retention of cattle cause overstocking, environmental degradation and loss of productivity in future years? Or maybe an increase in supplementary feeding costs?
A successful media campaign and re-active political decisions brought the live export market to a halt overnight. But did other markets open up? Cattle sales into the live export market stopped, but no doubt they increased into other markets. What were these markets paying? How much did it cost to bring the cattle to these markets? What was the impact of the influx of these particular types of cattle on these markets? Ultimately we need to consider all these factors and their impact on the profitability of the affected farms, not just the loss of income from one particular market. The marginal decrease in profits resulting from banning live export will be what determines the cost of the governments decision.
Finding answers will require experts that have a unique understanding of the principals of production, marketing and economics in farm businesses. Failure to address these questions with benchmark farm financial and production data and rigorous methodology will result in a major misinterpretation of the true cost of the Australian Government’s decision to temporarily ban the live export of cattle to south-east Asia.
Dr David Brown
David Brown was born and raised on a progressive sheep station in the far North West NSW. From an early age he has been working in the family business, and since 2010 David has been incorporating his practical experience into his profession role as a farm business consultant. A PhD graduate, David has skills in sheep and cattle production systems, whole farm performance analysis, investment appraisal and general farm economics. David loves working with farmers to improve their businesses, and digging into empirical data to find the answers to agricultures toughest questions.
Please do not hesitate to contact Morgana Harris at Nationwide Experts if you have any questions or comments. I trust this information is of interest.