Best to bottom profit gap widens

Huge gaps between the profits of the State's top and bottom farmers are emerging, even after last season delivered bumper yields in many areas.

Released this week, the Planfarm Bankwest Benchmarks used information supplied by clients of Planfarm, Bankwest and Bedbrook Johnston Williams and takes in 426 WA businesses farming a total area of more than 1.7 million hectares.

The benchmarks found that even though grain prices nose-dived as the season progressed, on average, WA farmers still managed a 7.16 per cent return on capital (excluding capital growth).

It was the best result in more than a decade but some fared better than others.

Although the average farm business in the L1 region, which encompasses Mullewa and areas to the east, recorded a 19.8 per cent return on capital, in the H2, H3 and H4 zones, which stretch from north of Moora to Katanning, return on capital was only between 3.1 and 3.2 per cent.

But while operating profits were up due to last year's bumper yields, that did not result in a large erosion of farm debt. The average farm increased its equity level by $375,000 but equity as a percentage remained stable in 2011, at 72 per cent.

It was the first time since 2005-2006 that equity levels had not dropped.

Farm debt now sits at more than $600 per effective hectare, although there is still some grain from last season to be marketed, which may impact on those figures.

In 1998, the average debt was about $120 per effective hectare and equity was more than 85 per cent.

Planfarm director Graeme McConnell, who presented the benchmarks, said ultimately 2011 had a limited impact on equity.

"If we can get those (equity levels) to 80 per cent as a business, I'd be feeling a bit more relaxed," he said.

"As those debt levels are getting higher, more money is being put into servicing these debts rather than investing in farm assets.

"Even the top 25 per cent (of farmers) are sitting around 74 to 75 per cent equity.

"They're lower than where I'd like them but they are better."

However, the more alarming figures are the gaps in profits between WA's top 25 per cent of producers and its bottom 25 per cent.

Determining the top 25 per cent of producers is based on operating surplus/hectare/mm of effective rainfall.

As a whole group, WA's bottom 25 per cent of farmers have made no return on capital over the past six years, whereas the middle half of farmers made a 2.7 per cent return and the top quarter 4.9 per cent.

But Mr McConnell said a 2.7 per cent cash flow return for the average farmer simply was not sustainable.

"It's probably one of my long-term concerns," he said. "I think long term, for the sector to be healthy, we need the average return on capital to be over 4 per cent.

"The low return on capital raises the question whether or not we can either find a way to increase profitability or whether the other way of correcting this is through lower land values."

When the returns on capital are broken down by region, just two regions' bottom 25 per cent of producers - M1 and M2, from north of Morawa to Wongan Hills and L1 - made positive returns on capital over the past six years, with 0.5 per cent and 7.1 per cent respectively.

The bottom producers for all other areas have made a loss over the past six years, with the greatest loss of -0.7 per cent in the Narrogin, Wagin and Katanning areas.

However, the top 25 per cent of producers for the same area made a 4.1 per cent return on capital.

On average, the top quarter of producers have a farm income that is greater than the average and the amount of grain produced per mm of effective rainfall is higher.

However, they also appear to be spending more to make more, and while the top 25 per cent used to have operating costs around the same amount as the average producer, in 2011, on average, they spent an extra $67/ha.

That equated to an increased income of $185/ha above the average.

Mr McConnell said there were really only two options for the producers that fell into the bottom 25 per cent - either find a way to make it into the average bracket or leave the industry.

"No one is going to stay in the industry very long generating a negative return on capital," he said.

"There are certainly some of those who have had one or two disastrous years but some have management or other type issues that have stopped them from performing."

Mr McConnell said that as an industry, farming needed to determine which management decisions and skills were crucial to the profit differences between the top and bottom producers and whether they could be implemented to other farm businesses.

That's the focus of the Bridging the Yield Gap program, which is looking at the top 25 grain producers in the high-to-medium rainfall areas to determine what has made them more successful.