Despite media focus on doom and gloom, and the very real problems of drought, tough competition, and economic pressures, Rebecca Spicer finds Australian agribusiness is one the most innovative and robust industries in the country.
And, in various ways, it is gearing up to tackle both new challenges and perennial problems with new methods.
Agriculture is pivotal in what constitutes an agribusiness, but it’s a diverse industry stretching far beyond the farm gate. As agribusiness advisory and research director, Tim Evans, defines it, the sector is made up of businesses involving agricultural products as part of the production and distribution chains, beginning with producers and ending with consumers.
To describe conditions in agribusiness over the past 40 years as tumultuous, may be an understatement. Farm consolidation, a strong move towards corporatisation, the commoditisation of agricultural products, competitive open markets, deregulation of the dairy industry, and unpredictable seasons, just to name a few, are characteristics of this diverse and constantly changing industry.
But things aren’t all bad. Agribusiness is adapting to constant change and meeting challenges head-on. In January 2005, the Australian Bureau of Statistics (ABS) reported the estimated gross value of Australian agricultural production to be $36.6 billion for the year ending June 30, 2004. This was up from $32.6 billion the previous year and has increased by more than six billion since results were released for the 1999-2000 year.
The Australian Farm Institute (AFI) conducted research into the economic activity generated by Australian agriculture and their March 2005 report, Australia’s Farm Dependent Economy, revealed agriculture is much more significant to the Australian economy than previously acknowledged. The project measured all economic activity within the farm sector, as well as within industries providing goods and services to farmers, and within industries using farm produce to manufacture or market products for consumption. It found Australian agriculture contributed 12.1 percent of national GDP for the six years to 2004—four times the simple measure of the value of commodities at the farm gate.
"Australian agriculture is actually doing very well," says Evans. "And not because of the drought easing. The drought will continue to hinder the whole agricultural industry. What has really driven Australian agriculture to where it is today is that they don’t have subsidies from the Australian government. The Australian community just can’t afford to subsidise agriculture, and so they have been forced to compete in an international market and because of that they’ve adopted best practice."
Major Trends
Farm consolidation and corporatisation has been the biggest trend to shift the agricultural sector over the years with the number of commercial farms in Australia falling by 50 percent over the 40 years to 2001, according to the Australian Bureau of Agricultural and Resource Economics (ABARE). "You still have a huge number of family-owned farms out there operating to various degrees of efficiency and they will remain to play an important part," says Evans. "But the major change in agriculture products over the last 50-odd years is that virtually every agricultural product is now a commodity. So instead of being able to command a relatively high price for a product that’s being sold in a closed market, now prices tend to be influenced by international factors—international supply and demand—and that has put more pressure on poor performing farm operations.
"What that has meant is we’ve had a lot of amalgamation of farm properties. We’ve now got a large number of corporates operating in the sector and that doesn’t necessarily mean they’re big publicly listed companies. It means some families, for example, have gone on the acquisition path and have purchased more property or they’ve increased their production."
A continuing problem for Australian producers is competing with imports bought by the supermarkets. "There’s been a lot of disquiet about the fact that supermarkets are effectively a duopoly and they do exercise market power and they do use that market power to their own advantage which is to drive prices down," says Evans. "But at the end of the day, if they drive the industry under it’s not going to benefit them because the most important thing to any purchaser of agricultural products or commodities is supply."
Evans also believes that due to consolidation in the sector, producers are relying more on off-farm income to remain viable. "The pressure won’t relent, there will be continued pressure on farmers to become more efficient. And the ones who don’t will have to rely to a greater degree on off-farm income or they’ll eventually be taken out of the market altogether."
This can also impact on regional communities. "All local business is dependent on agriculture regardless of what the business actually sells," argues Caroline Andrivon, small business field officer for the Greater Green Triangle Area Consultative Committee in regional Victoria. "If your cash flow is tight, you’re not going to go out and do discretionary spending whether for entertainment or just buying a new pair of shoes—it’s not just related to the agribusiness retailers."
However, less farms doesn’t necessarily mean less business for all those in the agribusiness chain. A research paper released by the Productivity Commission in July 2005 on Trends in Australian Agriculture, found agriculture output, while quite volatile because of droughts and other seasonal variations, increased by around two and a half times in real terms over the last four decades. This increase was also achieved without an increase in the number of agricultural workers, reflecting strong productivity growth in the sector.
And while drought, rocketing oil prices, and ongoing pressure for sustainable agriculture are continual pressures faced by agribusiness, Evans believes these are just some of the unique and inherent risks when your business is dependent on agricultural products, which shouldn’t come as a surprise to those in the industry. "The popular press plays up the plight of the average family farmer who’s struggling. You feel sympathetic but the reality is, if you’re in an agricultural enterprise you know there are significant risks and unpredictable risks but you have to build your business to ride those risks. If you don’t do that you’re going to be doomed."
United Force
One way Australian producers have become more competitive is to form co-operatives, either within a regional area or specific agricultural sectors. SunRice, for example, is the NSW rice growers co-operative which formed around 50 years ago and today is wholly owned by 2,000 rice-growing members. It is a perfect example for agribusiness, says CEO, Gary Helou. "SunRice is integrated from farm to consumption where the co-operative has an axis of control and influence over virtually all aspects of the business of rice from farm production to processing, marketing, brand ownership and distribution."
He believes there has been a continuing trend over the years for growers to join together to seek a position of advantage and competitiveness with co-operatives existing in many agribusiness sectors because the structure lends itself to regional communities and rural life. "Nearly every agribusiness has had a co-operative or still has a co-operative dimension to what they do," Helou says. "It’s a phenomenon that works well in some instances and not in others. It really depends on the industry’s dynamic and the way the business is matched."
In SunRice’s case, as we go t
o print, they’re in the process of converting from a co-operative to a company structure, which Helou says is happening across agribusiness sectors. While there will be little visible change to SunRice, members will now become shareholders and "see a slightly more effective way to organise ourselves and have a more improved capital structure for the business".
Despite the mounting pressures on agribusiness, the outlook from the business owners themselves seems positive. The quarterly Rabobank Rural Confidence Survey released in September 2005 reveals 39 percent of Australia’s primary producers now expect the agriculture economy to improve over the next 12 months. This is up by 18 percent on the previous quarter and, according to Rabobank, is the largest quarter-on-quarter increase in confidence observed in the last five years. Income expectations have also hit their highest levels in four years with almost 50 percent of primary producers expecting higher incomes over the next 12 months.
While latest statistics are an indication that farmers are recovering from the drought, some sectors are faring better than others. Peter Gorst operates Gorst Rural Supplies in Lake Bolac, regional Victoria, supplying farmers with everything from agricultural chemicals to animal health products. Since starting out in 1988 when the area was predominantly a wool growing region, Gorst has had to change his product lines and adapt to emerging broad acre cropping in the area, which is replacing wool businesses. "Wool’s been bloody ordinary for a while now," says Gorst, explaining that this has to do with consumers now having more options in products that once relied on wool.
This shift also encouraged Gorst to put on an agronomist—soil and crop management expert—as a free add-value service to farmers who needed a more scientific approach to their crop farming.
Positive Attitude
Despite the current trends, being big isn’t everything when it comes to the success of agribusiness. Mike Carroll, general manager for agribusiness at the National Australia Bank, says adopting sustainable finances, a positive attitude and embracing technology will keep SMEs in the game.
"Bigger doesn’t necessarily mean better in agriculture, despite farm consolidation being a fact of life and many smaller farms being bought out by their more profitable neighbours. Attitude is what’s important—the willingness to change, to explore more efficient production practices and adopt new technology.
"There is no denying size is a factor in the success of a farm business. Spreading overheads across a greater level of production will help to lift productivity, and declining terms of trade is just one of the underlying pressures driving this need.
"Over the past 40 years, the average property size in Australia has increased by over 50 percent. Each year around one in 20 farmers increase the size of their property by around 25 percent. Farms with turnover of less than $100,000 are disappearing while farms with turnover of greater than $100,000 are increasing in number. Off-farm income is becoming more important, and not just to farmers with smaller properties.
"But scale alone is not a panacea for low returns. The best of the mid-sized farms actually generate returns of 5.9 percent compared with a return of 2.8 percent generated by the average of their larger peers. And, indeed, the top small farms are also making money, albeit less.
"One of the keys to success is to ensure you don’t over extend on borrowings. Recommendations to ‘get big or get out’ came unstuck in the 1980s due to farmers borrowing more than they could service through downturns in seasonal conditions and commodity prices.
"While we have seen a strong increase in debt over the past five years of 14 percent per annum, average farm debt has remained in line with farm incomes.
"The recent drought has shown the value in having a more sustainable attitude to farm finance. Despite it being a ‘one-in-100 year’ drought, on the whole farmers fared far better with regard to debt than in many previous droughts. Conditions across the country are slowly returning to normal, with a good seasonal outlook in most areas despite others still desperately needing more water in dams.
"Farms with debt actually tend to outperform those without it. A sensible level of debt seems to sharpen the focus on the business—not least, no doubt, due to regularly having to report to the bank manager. I also think that leasing presents some opportunities for Australian farmers, particularly those with properties that aren’t big enough to take full advantage of economies of scale. Only some 6 percent of agricultural land is leased currently, but I sense this growing strongly—as is share farming. Demand is far greater than supply, with many of our customers unable to find long-term leases at rates which allow them a reasonable return. There are plenty of farmers who might achieve a better return through leasing to someone else with the enthusiasm to take on more land without wanting to buy it.
"There’s an enormous variation between average farm performance and the top 25 percent in each sector that highlights the enormous potential to improve. The challenge, whether you have a small farm or a large operation, is to take on best practice. Again, it’s attitude that will determine success.
"The management practices and technology clearly exist to increase productivity, as the top performers are using them. As more and more people take these on, overall performance for each sector will lift.
"To find the leading edge, look to researchers and the farmers pushing the boundaries of current technology. What they are doing today may be mainstream in the future."
Agribusiness advisory and research director, Tim Evans, believes the organisations and farmers who embrace technology have been the ones who’ve tended to do well. "Technology just doesn’t come in the form of better equipment and better tractors, it comes in the form of actually running things better in farming enterprises."
Small business field officer, Caroline Andrivon, believes farmers are becoming more innovative with their land use and new businesses are forming. "Down here (in Victoria) in our volcanic area, where farmers have in the past not really worried about clearing land, as land prices have become more expensive they’re now looking at this unutilised component of their farm. Businesses have developed in the clearing and crushing of rocks from the land which gives back to the farmer more land to farm."
While the strongest farms on average are larger, Carroll believes there are other characteristics of successful and productive farms that cross all boundaries: they seek new ideas and outside advice from a wide range of sources; they have inquisitive minds and are receptive to new ideas and look for new approaches; they embrace new technology but do so judiciously; they test it and watch others’ experiences and when they’re confident of its value are quick to adopt it; they understand the key value drivers of their business and focus their energy on the things that really make a difference; they know their market’s requirements and produce to its specifications; and perhaps most importantly they enjoy what they do.
Excelling in Export
Agricultural exports accounted for around 22 percent of total exports in 2003-04 according to the Productivity Commission’s Trends in Australian Agriculture report, and around two thirds of agriculture production is now exported. The report found Australian agricultural industries have become more export oriented, and exports more di
verse, with less reliance on traditional commodities such as wool and more on processed products such as wine, cheese and seafood.
Being so dependent on international prices has forced the agribusiness industry to be innovative. "Australian agriculture businesses tends to be world leaders in innovation," says Agribusiness Advisory and Research director, Tim Evans. "That’s also driven by the fact that our agricultural sector isn’t subsidised and there’s very little protection for the industry. Everything they do they pretty much have to do in an open market. Competing with heavily subsidised competitors from overseas has driven innovation."
Consequently, Australian agribusiness should benefit from Australia’s free trade agreements now formed with the US, Thailand, Singapore, and New Zealand, but according to the Lucas Group’s research, many agribusiness employers are still unsure how they will be affected.
So it seems the future, like the present, will be both positive and negative for Australian agribusiness. "I think we’re very well set up to prosper in the future," says Evans. "Most of the major industry sectors are performing well and I think they’ll continue to do that." However, he believes the sector will continue to consolidate. "It just has to. The downside of that is the smaller towns will tend to suffer because there’s been a consolidation of the larger, but there are still very many prosperous sectors in agribusiness."
Workers Wanted
While agribusiness is expanding on many fronts, it is understaffed and needs a major image overall and wage review to draw a young workforce from urban areas.
Innovation and increasing diversity are sweeping agribusiness to a strong future, but if the current shortage of skilled workers isn’t addressed soon this momentum will be undermined.
Research by the Australian Farm Institute (AFI) reveals there is increasing diversity in the Australian farm sector and this not only applies to the range of commodities being produced, but also to the motivations and beliefs of the people who operate Australian farms.
"A person operating a small-scale beef enterprise in a high rainfall zone and who works full-time off-farm during the week has vastly different interests and motivations to the operator of a large-scale, intensively managed horticulture enterprise," says AFI executive director, Mick Keogh.
In considering these ongoing demographic changes, the AFI believes a key challenge is the ability of the farm sector to compete with other sectors for labour.
Agribusiness recruitment specialists, the Lucas Group conducts annual surveys of agriculture and agribusiness employers and its 2005 report reveals recruitment and retention of skilled staff is a significant issue for the industry: "Australian agribusiness employers are facing a severe shortage of staff, both skilled and unskilled. Difficulty in sourcing skilled staff is a significant issue amongst 53.47 percent of employers. If not addressed it is likely to have long-term effects on the growth of agribusiness enterprises."
Some 70 percent of agribusiness employers surveyed say they would employ a skilled migrant to fill a vacancy within their organisation and more than three quarters of employers believe government and industry don’t do enough to promote agribusiness as a career of choice. "There is genuine concern that there is not enough ‘new blood’ entering the sector and agribusiness doesn’t appear to be desirable as a career path among the majority of school leavers," the report states.
The AFI suggests in the medium to long term, a substantial shift will need to occur in how farmers manage the rural workforce. "The focus on keeping rural wages low will need to change, and a greater focus will need to be placed on ‘professionalising’ the rural workforce by developing training and career structures.
The Australian government is making attempts to ease the pressure on agribusinesses with programs offered through the Department of Agriculture, Fisheries and Forestry, but according to Peter Gorst of Gorst Rural Supplies in Lake Bolac, regional Victoria, who is at the coalface of the issue, the government simply isn’t doing enough. He will be one of many business owners in rural areas looking for skilled staff in the coming months. "I’ll be looking for another two staff and in a one-pub town you can’t just go and get anybody," he says. "With the lack of work and perhaps social activities in the bush it’s hard to keep young people from wanting to go to the city." And while using a recruitment company isn’t Gorst’s preferred option, he may be left with little choice.
The National Farmers’ Federation believes positive promotion of rural Australia has a key role to play in combating the issue of labour shortages. Consequently they’re in the process of rolling out their Campaign for Australian Agriculture to help bridge the divide between city and country and present a more positive understanding of rural Australia for metropolitan Australians through awareness-raising activities and education.
Agribusiness Quick Links
Australian Government Agriculture Portal— http://www.agriculture.gov.au
Agribusiness Association of Australia— http://www.agribusiness.asn.au
Australian Bureau of Agricultural & Resource Economics— http://www.abare.gov.au
Department of Agriculture, Fisheries & Forestry— http://www.daff.gov.au
New Industries Development Program— http://www.daff.gov.au/agribiz
Rural Industries Research & Development Corporation— http://www.rirdc.gov.au
Australian Farm Institute— http://www.farminstitute.org.au
Agriculture Advancing Australia (AAA) FarmBis— http://www.farmbis.gov.au
