Hello
Greetings from Monterey Bay, California! We finished up an action packed week of farm and industry tours in Australia and arrived Sunday in sunny California. It’s nice to be back on North American soil, although I’m not home, I’m no longer a world away. The trip continues to open my eyes to the diversity across this business of ours called agriculture and the innovative people involved. In the last ten days we’ve visited growers who produce and market fruits, veggies, dairy, sheep, hogs, almonds, pistachios, brine shrimp, bio-diesel, fertilizers and compost. I’ll finish up my writings on Australia with a few things I’ve learned and then move on to Californian agriculture in next week’s issue. We have a few more days here and then we move onto Mexico this Saturday. Have a great week.
Agronomist Notes
Farm Business Models Are Flawed
The farming industry has forever flown by the seat of its pants with respect to how it makes business decisions. The current business model in farming is flawed in several ways, according to Phil O’Callaghan, a farm business consultant. Phil owns O’Callaghan Rural Management, a consulting business offering services in accounting, business planning and farm succession planning.
The first flaw is that few costs are linked to farm output. For example, how many producers calculate the cost of each farm input to the output of one bushel of grain? The net benefit of understanding this matrix, for instance, how much labour costs you per unit of output allows you to tweak certain areas and track changes over time. Bottom line, if you don’t measure, you don’t where to start from or where you’re going.
The next flaw Phil talked about was that fixed costs are rarely maximized. For instance, how many producers are over capitalized in both land and machinery? We know that most of us are and the deciding factor in many cases is whether we can cash flow the item over the term of the loan or lease. Does that make sense? Identifying how a piece of equipment or land provides you with the most economical benefit will net you more profit than basing decisions on cash flow.
The third most flawed factor in farm business models is a producer’s lack of understanding of risk. We know we live in a world where large risks can provide large returns, but how do we know how much risk is worth and what the expected returns should be? How many producers measure risk by gut feel? I would guess 98% of producers do and do a pretty good job of it after years of practice. However, pretty good is nowhere near great and way left of excellent. The bottom line is for us as producers and industry to start searching and developing risk management models, models we can base solid decisions from. If every blue chip company out there today employs a model that measures risk, then it’s time the farming industry starts.
This was the take home message I heard in Phil’s presentation: we need to start treating our farm business like a business. I’m trying not to generalize nor insult producers because I know many farmers who are savvy and do a very good job of managing their business. However, I’m rarely satisfied with doing a good job when I have the opportunity to do a great job. SL
The Great Water Debate
Six years ago, Alberta was discussing water scarcity and setting up a water trading market during the drought. All it takes is a few wet years and everyone moves on to the next topic. When was the last time you heard someone talk about managing agricultural water for the future? There are discussions about water rights, allocation and transport to meet urban demands but not so much for agriculture.
I recently sat in on an interesting discussion on the implementation and subsequent outcomes of an irrigation water trading system in Victoria, Australia. As Mark Twain put it, whisky’s for drinking and water’s for fighting over.
After several years of drought, water restrictions, talk of climate change, reduced irrigation allocations and a landscape of weeds instead of green fields, water is the hottest commodity around the state of Victoria. About twenty years ago, Victoria began auctioning water use licenses to farmers. They could either use the water to grow their crops or sell the rights and profit from the trade. The benefits of this system included economic development through new infrastructure development and environmental improvements through efficiency gains in transporting, metering, and applying water. Clearly defined water property rights helped to reduce arguments over the equitable share of the public’s water resources. The sale of water rights was regulated by the government although allocations could be traded between farmers and brokers but only with the approval of the governing body.
Water in Victoria was trading for about $90 a megalitre (I megalitre equals 1million litres) and shot up over $2,100 a megalitre in recent drought years. The subsequent change in farming enterprises from the increased cost of water was the interesting to observe. Areas with limited water allocations began shifting to higher value crops such as fruit and vegetables, leaving behind traditional cereals and oilseeds. Dairy operations started popping up with herd sizes of 300 to more than 1,000 head milked each day. It was those types of operations that could afford to pay for high water prices. The common argument is how much revenue is generated per megalitre of water. Obviously high value crops and products win the argument hands down.
The quarrel over the best uses for our most precious commodity must be kept into perspective. There is a natural human concern when rivers run dry and lakes dry up for periods of time. Environmentalists cry out at agriculture in the face of water shortages spouting ignorance and reforms to our farming systems. We must remember that nature is cyclical and when rivers run dry, we shouldn’t automatically point the finger at man. A great example was given by a Nuffield Scholar at the conference where he put up a picture of the mighty Murray River in southeast of Australia. The Murray River has been manipulated with weirs, dams and structures over the past century to maintain consistent water flows. The picture was taken in 1914 with dozens of horse and buggies racing on the bottom of the dry river bed.
Alberta has had discussions surrounding the implementation of a water trading system. A water trading scheme would affect roughly 1.6 million acres of irrigated land. As noted in the case of Victoria, there are many benefits with the use of a water trading system. There are also serious and significant changes to the industry when the resource becomes scarce.
I’m picturing this: another drought grips Alberta, a water trading system is in place, the cost of water allocations go through the roof, land use changes from feed crops to vegetables and we lose our billion dollar feedlot industry. That’s serious. When a water trading system is proposed for our province, we must understand the ramifications and get it right.
For more information on water in Australia’s visit Land and Water Australia www.lwa.gov.au .
High Profit Farming in Northern Australia
High profit farming in Northern Australia – a new era in grain farming. This GRDC-commissioned report states that increased new technology adoption would greatly increase grain yields in the northern region. The report outlines in detail the ten most important farming practices, along with the key profit drivers. Gains from new technology can be substantial. The report states that zero-till has been shown to have the capacity of doubling farm profitability.
Full report: http://www.grdc.com.au/uploads/documents/GRDC_profit.pdf
Market News
Largest Grain Farmer in Australia
Grain grower John Nicoletti from Western Australia is on track to produce one of the biggest harvests ever recorded in Australian history. Mr Nicoletti has confirmed he is planting a 100,000ha crop this year, making it the largest individual cropping program ever in the nation. The Nicoletti Group family enterprise is planting 11,000ha more than NSW grain grower, Ron Greentree, who is widely regarded in the industry as Australia’s biggest private grain grower.
First Steps in Replacing the Australian Single Desk
Minister for Agriculture, Tony Burke outlined key elements in the new wheat reforms legislation to regulate exporters. A special accreditation system for buyers of wheat, which will include proof of trading history and guaranteed access conditions to ports and infrastructure, will be the key planks in the government's new wheat marketing system replacing the single desk.
Oilseed Prices Climb in Wake of Damage to China Rapeseed
Last week saw yet another wild week in the oilseeds markets. The damage to the Chinese rapeseed crop has been the catalyst to this latest rally and this has pulled fresh fund money into the market. The tightness in the old crop supply and demand and resulting carryout at the end of this season means we need an increase in production next season and cannot afford to have any crop problems anywhere in the world.
Source: Gleadell Agriculture Ltd.
Brazil’s Corn Crop Above Average
Brazil's main corn crop will total 38 million tons, compared to 36 million tons last season, according to the latest estimates from the government's crop supply agency Conab. The winter corn crop is estimated at 15 million tons, up from 14 million tons last year.
Source: dtn
