Ag productivity at risk as volatile seasons make farmers debt-wary

While the nation's total farm debt jumped to $116 billion at the end of last financial year, many producers have taken a more pragmatically cautious approach to borrowing as they confront increased seasonal and market volatility risks.

Half of all Australian farms have little or no debt at all, according to the Australian Prudential Regulatory Authority.

Farm equity levels have been consistently high since 2001, averaging around 90 per cent in recent years, underpinned by helpfully strong growth in land values.

"The way many people are managing their risk is to maintain high levels of equity in their properties," said Australian Bureau of Agricultural and Resource Economics and Sciences executive director, Jared Greenville.

"They're working against a different environment with increasing variables, which plays a role in how and when farmers make investments."

Dr Greenville said while farm debt was growing steadily, it was not growing at all levels across the industry.

ABARES's farm surveys indicated only 23pc of Australia's broadacre and dairy farms took on more debt in 2020-21 and 2021-22, and 37pc of farms had no debt at all.

The average capital values of those farms was $11m by 2022.

While farm debt grew to almost average $990,000, as 60pc of farms bought more equipment and machinery and 6pc bought more land, equity levels still remained remarkably conservative, hitting a two-decade high of 91pc in 2021-22.

Dr Greenville observed agriculture was relying less on taking borrowing risks for business expansion than many other sectors of the economy.

Debt averse farmers were opting to minimise borrowings to fund expansion strategies in order to avoid being caught by costly, lengthy droughts, or commodity market downturns.

"Rather than growing the size of the enterprise or productivity by much, they're setting the business up to manage the downside risks by simply not being as eager to borrow," he said.

"So, if a chance comes along to buy the farm next door, or make some other significant investment, they are less ready to make that decision."

Equity ratios tended to be lowest among larger farms enterprises with high cash flow turnover.

These big-scale businesses were typically the major users of debt financing and were also generally able to service larger debts.

Senior ABARES economist and Deakin University adjunct associate professor, Neal Hughes, said although having more cash in the bank was seen as defining a secure business, the reality was those farm businesses were potentially planting less, or running fewer livestock, and making less money.

"Lack of debt could be a good thing, but it can also be a barrier to expansion and getting fresh entrants in the industry," he said.

Dr Greenville told this month's ABARES Outlook Conference farm profitability would be dependent on rekindling farm productivity growth, which had fluctuated notably since the turn of the century, but was now averaging 0.6pc.

That was almost down to a quarter of the growth rate achieved in the 1980s and '90s, when farmers were well ahead of productivity levels occurring elsewhere in the economy.

Farmers' expanding their operations into neighbouring holdings had been a significant contributor to past productivity gains, but that trend was slower now.

More recently, rapid property price rises had made farmland expansion harder for many producers to absorb, especially if they were concerned about seasonal fluctuations and costs squeezing their profits.

"We know climate is playing a role in reducing productivity gains, but it's not the only driver at play," Dr Greenville said.

"Cost pressures are rising again and farmer terms of trade have deteriorated about 20pc in the past couple of years."

He said ensuring the industry maintained investment in Australia's world class agricultural research and development systems would be an important contributor to lifting its game, but other farm level investment strategies were also likely to be needed.