Is 100% equity lazy?

Budgets are tight!
1 May 2024 by
Seed Terminator, Kelly Ingram

Budgets are tight!

Fuel, Fertiliser, Chemical, Insurance and Labour costs, among other things, have risen over the past few years, increasing costs across the board.

Fertiliser has eased a little, with Urea and UAN coming down in price, but the compound fertilisers have not come off as much as the international market for these products may suggest. Chemical prices were high for a couple of years but are now close to normal, assuming you're not chasing the fancy stuff.

And grain prices are easing as well. Who knows what they will be at harvest, but they have certainly come off in recent months. However, keep in mind that our current grain prices are still very strong compared to 10 year averages, it’s just that prices have come off compared to the record highs that we saw after the invasion of Ukraine.

Many budgets that I am preparing at the moment are anything from a small loss to a small profit, but no budgets are showing a healthy profit.

All sounds a bit negative doesn’t it, but this has been the theme for the past few years, yet many growers have made healthy profits in some parts of the country. However, when we get a stinker of year, the losses are significant.

What can we do in this current economic climate?

Obviously, keeping a lid on costs where you can, goes without saying. But the other side of the ledger is income. Growers who have made significant gains through improving their soil, efficiency, timing, crop rotation etc. are doing just fine.

If you have seen soil improvements being made by your neighbours with spectacular results, get on board.  This will be the biggest return on investment you can make on your farm.

The other thing we need to talk about is ‘below the line’ costs. From the operating profit we need to deduct personal drawings, machinery costs (depreciation or finance), lease costs, finance (interest) and tax.

The one I would like to focus on is finance.

There is an old saying that farming at 100% equity is lazy. What they are getting at is that when you get to 100% equity, you should look to utilise this borrowing power and expand your business by buying more land or off farm investments.

However, in my experience, farmers at 100% equity are loving life! They sleep well at night knowing that there will be seasonal ups and downs, but they can ride these out with a strong balance sheet behind them.

Sure, if you’re an emerging business, and need to expand, 100% equity is likely a long way off.

But if you have good scale, and your machinery investment matches your business scale, then what is wrong with staying at 100% equity and investing future profits on or off farm?

When budgets are tight, like this year, those at 100% equity have little or no finance costs below the line, giving them a better chance of making a bottom line surplus.

This may seem like a long way off for some businesses, but it is important to make this point.

It’s what you do in the good years that matters.

There’s only so much you can do in a bad year, but when you have a good year, and make a profit, if you use that profit to pay down debt, you are setting yourself up for future success, and a better night’s sleep.

100% equity isn’t lazy. It’s awesome.

Ask the Agro a question.

After last month’s edition, ‘The Great Sheep Debate’, we received a couple of great questions.

Q. What sort of capital infrastructure $ is needed in a farming operation compared to a sheep operation?

I know where you are coming from. You’re thinking, yes, cropping is more profitable, but it needs a lot more machinery infrastructure than livestock. So, while sheep may not look as profitable, less capital is invested in the gear (assuming you’ve got fences, yards, handling gear, shearing sheds, tractors, and hay gear in good order).

Yes, but…

If we are talking about a mixed farm, they will still need cropping equipment. The value of the equipment owned should match the scale of the cropping area. So yes, a 100% cropping farm will have more money invested in the gear, but both farms should have about the same value of gear per cropped hectare.

Q. Why was the crop profit of the farmer down the road double the crop profit of the farmer, being $170ha, who ran sheep (same rainfall)?

This question relates to the example I gave last month where a 100% cropper was making $350/ha profit, where a mixed farmer down the road made a profit of $170/ha from his crop with the same rainfall.


A few reasons.

  1. The 100% cropper is a gun! He does everything well and on time, and his cereals do extremely well on legume crop stubbles.
  2. The 100% cropper kept a lid on costs and ran his machinery over a large area, making his business very efficient.
  3. The 100% cropper kills summer weeds as soon as they emerge rather than using them for sheep feed and doing a single spray.
  4. It wasn’t a perfectly fair comparison. The 100% cropper has better cropping soil types than the mixed farmer who had a combination of good cropping country and poorer country.

It wasn’t a completely fair comparison due to soil type, but it is a trend I see. The 100% croppers tend to grow very profitable crops.

The Terminator Agronomist

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P.s. Ask the terminator a question, and get a blunt answer next month.

P.p.s. Please note this advice is general in nature and not based on your specific circumstances.

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