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HARVEST
STORAGE
FARM RESOURCES – HOW CAN YOU ACCESS THEM MORE EFFECTIVELY?
FINDING THE RIGHT FARM BUSINESS MODEL
NEXT STEPS
ADDITIONAL INFORMATION
ISBN: 978-1-921779-46-6 (online only)
All rights reserved.
GRDC contact details
Ms Maureen Cribb, Manager Integrated Publications Grains Research & Development Corporation PO Box 5367 Kingston ACT 2604 Phone: 02 6166 4500 Email: [email protected]
DISCLAIMER
Any recommendations, suggestions or opinions contained in this publication do not necessarily represent the policy or views of the Grains Research and Development Corporation (GRDC). No person should act on the basis of the contents of this publication without first obtaining specific, independent professional advice.
The Grains Research and Development Corporation may identify products by proprietary or trade names to help readers identify particular types of products. We do not endorse or recommend the products of any manufacturer referred to. Other products may perform as well as or better than those specifically referred to. The GRDC will not be liable for any loss, damage, cost or expense incurred or arising by reason of any person using or relying on the information in this publication.
Copyright @ All material published in this GrowNote is copyright protected and may not be reproduced in any form without written permission from the GRDC.
GROWNOTES
2.1.1. Improved profitability .............................................................................................................. 13 2.1.2. Risk management ................................................................................................................... 14 2.1.3. Supporting business succession ....................................................................................... 14 2.1.4. Access to capital ..................................................................................................................... 15
Business structures for succession .................................................................................................... 15 2.2. Step 2 – What do the key people in your farm business need? ..................................... 16 2.3. Step 3 – What stage of the business cycle are you in? ...................................................... 17 2.4. Step 4 – What is your financial position? ................................................................................. 18 2.5. Step 5 – What farm resources do you have available? ...................................................... 18 2.6. Useful links and additional information – assessing your farm business ...................... 19 Farm resources – how can you access them more effectively? .............................................20 3.1 Separating farm assets and operations .....................................................................................20 3.2 Exploring farm resources in detail ...............................................................................................21 Separating farm business assets and operations .........................................................................21 Basic principles of the farm business model ..................................................................................21
3.2.1. Land ...........................................................................................................................................22 3.2.2. Irrigation water ......................................................................................................................24 3.2.3. Livestock .................................................................................................................................24 3.2.4. Management ..........................................................................................................................25 3.2.5. Labour and machinery .......................................................................................................25 3.2.6. Capital ......................................................................................................................................26 3.2.7. Reflection and summary ..................................................................................................... 27
4.1.1. ‘Nesting’ business models in the family farm .................................................................. 31 4.1.2. Family labour ............................................................................................................................ 31 4.1.3. Establishing an equitable family farm agreement .......................................................32 4.1.4. Analysis of financial performance – family farms ........................................................ 33 4.1.5. Self-assessment – family farm model ............................................................................. 33 4.1.6. Useful links and additional information – family farms .............................................. 34
4.2. Leasing ............................................................................................................................................... 34 4.2.1. Operating solely on leased land ......................................................................................36 4.2.2. Developing a leasing model ............................................................................................ 37
‘Sale and lease back’ ............................................................................................................................. 37 4.2.3. Establishing an equitable lease agreement ................................................................39 4.2.4. Participatory leases .............................................................................................................40 4.2.5. Analysis of financial performance – leasing ................................................................ 41 4.2.6. Self-assessment – leasing model ................................................................................... 43 4.2.7. Useful links and additional information – leasing ....................................................... 43
4.3. Share farming ...................................................................................................................................46 4.3.1. Operating solely on share-farmed land ......................................................................... 47 4.3.2. Developing a share farming model ................................................................................ 47 4.3.3. Establishing an equitable share-farm agreement ......................................................49 4.3.4. Profit sharing agreements .................................................................................................50 4.3.5. Analysis of financial performance – share farming ....................................................51 4.3.6. Self-assessment – share-farming model ......................................................................53 4.3.7. Useful links and additional information – share farming ..........................................53
4.4. Contracting ........................................................................................................................................53 4.4.1. Operating solely as a contractor ......................................................................................56
GROWNOTES
4.5. Joint ventures (equity partnerships)..........................................................................................62 4.5.1. Access to capital through joint ventures .......................................................................63 4.5.2. Equity partnerships ..............................................................................................................63 4.5.3. Developing an equity partnership model ....................................................................64 4.5.4. Establishing an equitable joint venture agreement ..................................................66 4.5.5. Analysis of financial performance – joint ventures ................................................... 67 4.5.6. Self-assessment – equity partnership model .............................................................69 4.5.7. Useful links and additional information – joint ventures ..........................................69
4.6. Financial comparisons of farm business models .................................................................69 4.6.1. Comparing farm business models for a dryland
cropping operation – the assumptions ............................................................................ 72 4.6.2. Comparing farm business models for a dryland
cropping operation – the results ......................................................................................... 72 4.6.3. Varying key inputs – what happens to financial returns? ........................................ 75 4.6.4. Detailed assumptions for financial analysis by model type ................................... 79
Next steps ..................................................................................................................................................85 Additional information ............................................................................................................................86 6.1. Introduction to farm business models ......................................................................................86
farm businesses ........................................................................................................................89 6.2 Assessing your current business model ..................................................................................90
for farm business.......................................................................................................................92 6.2.6. Returns from agriculture compared with other asset classes ...............................94 6.2.7. Access to capital for farm businesses elsewhere around the world ...................96 6.2.8. Stage of business cycle and implications for business goals
and performance targets........................................................................................................ 97 6.2.9. Grains industry profile: stages of business cycle, business
and ‘EweBank’ (proposal) .......................................................................................................101 6.3.4. High labour efficiency can be achieved with models other
than family farms ..................................................................................................................... 102 6.4. Finding the right farm business model .................................................................................. 103
6.4.1. Nesting farm business models in the family farm ..................................................... 103 6.4.2. Off-farm employment – diversifying income sources and lowering risk ......... 104 6.4.3. Leasing and share farming – lessons from abroad ................................................ 105 6.4.4. What proportion of total farm capital is attributed to land? ...................................107 6.4.5. Increasing land values – a driver for increasing lease costs
and lower profitability ............................................................................................................ 108 6.4.6. Acts of parliament covering lease and share farming agreements .................. 109 6.4.7. What proportion of total farm capital is attributed to machinery? ....................... 109 6.4.8. Example contract farming agreement ...........................................................................110 6.4.9. Corporate farming – a form of joint venture ..............................................................114
Endnotes ....................................................................................................................................................116
GROWNOTES
arrangements for farm resources. ..............................................................................................30 Table 5 Developing a family farm business model – summary. ............................................32 Table 6 Key performance indicators and profit drivers for family farms. ............................. 34 Table 7 Self-assessment guide – family farm business model. ..............................................35 Table 8 Developing a leasing business model – summary. ....................................................38 Table 9 Summary of income and costs – example of a dryland cropping operation
under a leasing farm business model. ......................................................................................42 Table 10 Self-assessment guide – leasing business model. ................................................... 44 Table 11 Developing a share-farming agreement – summary. .................................................48 Table 12 Summary of income and costs – example of a dryland cropping operation
under a share-farming business model using a ‘profit share’ agreement. ...................52 Table 13 Self-assessment guide – share-farming business model. .......................................54 Table 14 Developing a contracting agreement – summary. ..................................................... 57 Table 15 Summary of income and costs – example of a dryland cropping operation
under a contracting business model (machinery and management)..............................59 Table 16 Self-assessment guide – contracting business model. ............................................60 Table 17 Developing an equity partnership model – summary. ..............................................66 Table 18 Summary of income and costs – example of a dryland cropping operation
under an equity partnership business model. ........................................................................68 Table 19 Self-assessment guide – joint venture (equity partnership) business model. ...........70 Table 20 Summary of management plan and crop gross margins used in analysis. ...... 72 Table 21 Results of financial analysis – the farm business operator’s perspective. ......... 73 Table 22 Results of financial analysis – the landowner’s perspective. ................................ 73 Table 23 Impact of variations in key input assumptions on profit for the family farm
business model – results from @Risk........................................................................................ 76 Table 24 Detailed assumptions for financial analysis – leasing. ............................................80 Table 25 Detailed assumptions for financial analysis – share farming (profit share). ....... 81 Table 26 Detailed assumptions for financial analysis – share farming (75:25). .................82 Table 27 Detailed assumptions for financial analysis – contracting......................................83 Table 28 Detailed assumptions for financial analysis – joint venture (equity partnership). ....84 Average farm business scale. .............................................................................................................86 Grain production 2014-15. .....................................................................................................................86 Grain production ranges. ......................................................................................................................86 Table 29 Corporate farms with greater than $2 million annual income, 2006
compared with 2011. ........................................................................................................................88 Table 30 Land values for broadacre farms by zone 1977-78 versus 2013-14. ....................93 Table 31 Australian farmland values – change in national median value. ...........................93 Table 32 Australian farmland values – change in national median value by state. .........94 Table 33 Financial performance of broadacre farms by industry. ..........................................95 Table 34 Rate of return to total capital, excluding appreciation, by industry,
farm size and performance rank. ................................................................................................96 Table 35 Lease and share-farming data – proportion of total business and
total farm area (by commercial farm performance dataset). ............................................ 103 Table 36 East Europe European Union member states – land tenure, 2007. ................. 106 Table 37 AgProfit (2010 to 2014) – owned land asset value as percentage
of total farm asset value. .............................................................................................................. 108 Table 38 AgProfit (2010 to 2014) – machinery asset value as a percentage
of total farm asset value. .............................................................................................................. 109 Table 39 Main corporate farm business models in Australia. ..................................................115
FARM BUSINESS MODELS – OPTIONS FOR BUILDING YOUR FUTURE6
GROWNOTES
FARM BUSINESS MODELS
List of Figures Figure 1: Sources of farm business capital for Australian broad acre and dairy
farm businesses, 1994-95 to 2014-15. .......................................................................................... 15 Figure 2: Stages of business cycle. .................................................................................................................17 Figure 3: Comparing the profit distribution of share farming models from the
share farmer’s perspective using @Risk. ...................................................................................77 Figure 4: Comparing the profit distribution of share farming and leasing models
from the farm business operator’s perspective using @Risk. ...........................................77 Figure 5: Comparing the profit distribution of share farming and three-way joint
venture models from the farm business operator’s perspective using @Risk. ...................78 Figure 6: Comparing the profit distribution for the share farmer and landowner
in a share farming (75:25) agreement using @Risk. ............................................................ 79 Figure 7: Comparing the profit distribution for the share farmer and landowner
in a profit share agreement using @Risk. ................................................................................. 79 Figure 8: Australian farm business income by income category. ......................................................87 Figure 9: Business entity type in Australia – comparison between farm businesses
and rest of economy. ........................................................................................................................89 Figure 10: Productivity growth for specialist cropping farm businesses
and international investments .....................................................................................................95 Figure 14: GRDC Grower Survey (2015) – stage of business cycle. .................................................98 Figure 15: GRDC Grower Survey (2015) – industry perception. .........................................................98 Figure 16: GRDC Grower Survey (2014) – business planning. ............................................................99 Figure 17: Irrigation water temporary trade within Murray Irrigation system – volume
and weighted average price for sales from 1998-99 to 2014-15. .................................101 Figure 18: Labour indicators for broadacre grain farms. .......................................................................103 Figure 19: ABARES Farm Survey (1990 to 2014) – lease as proportion (%) of total
cash costs for specialist cropping businesses. ...................................................................104 Figure 20: Off-farm income – ABARES NSW mixed crops and livestock
land rented or leased. ..................................................................................................................106 Figure 23: ABARES Farm Surveys (1990 to 2014): capital values for land and fixed
List of Videos Introduction to Farm Business Models GrowNotes™ – Animation ........................................... 10 Graham Mattschoss (grower), Yorke Peninsula, SA .....................................................................29 David Heinjus (consultant), Clare, SA ............................................................................................... 31 Simon Ballinger (grower), Wolseley, SA ...........................................................................................32 Scott Campbell (grower, Keith, SA .................................................................................................... 33 David Critch (grower), Mullewa, WA ................................................................................................. 34 Phil O’Callaghan (consultant), Bendigo, Vic ..................................................................................46 Alex and Helen Jobling (grower), Swan Hill, Vic ........................................................................... 47 Brian Wibberley (consultant) ................................................................................................................62 Graham Mattschoss (grower), Yorke Peninsula, SA .....................................................................64 Paul Schulz (grower), Sandilands, SA ..............................................................................................66
FARM BUSINESS MODELS – OPTIONS FOR BUILDING YOUR FUTURE 7
GROWNOTES
Foreword
GrowNotesTM reflect the GRDC’s commitment to equipping growers and advisers with up-to-date, relevant and comprehensive farm business management information to complement the GRDC’s investment in grains research, development and extension (RD&E).
The primary focus of the GRDC’s investment in RD&E is in the production technology fields of plant breeding and agronomy, covering areas such as variety selection, application rates and timing, row spacing and farming systems. The overall aim is to ensure profitable and sustainable farm businesses. Growers need to assess available production technologies for suitability before incorporating them into their farming systems. The process of assessing and adopting production technologies requires skills and knowledge in farm business management.
The GRDC recognises the importance of business management knowledge and skills in assessing and adopting the outcomes of its RD&E investments. This GrowNotesTM is the first to focus on farm business management, complementing the existing GrowNotes that focus on crop-specific production.
GrowNotes are industry-owned resources, developed with input from respected advisers, researchers and growers. The process for developing a GrowNotesTM is particularly well suited to the needs of farm business models, as there are many options and relatively few other sources of comprehensive information and resources.
I trust that you will find the GRDC’s Farm Business Models GrowNotesTM useful in the management of your farm business.
Sincerely,
GROWNOTES
Acknowledgements The project manager for and major contributor to this GrowNotes was Andrew Rice (ORM Pty Ltd).
ORM was assisted in the development of the publication by a steering committee comprising growers and advisers (Table 1). A subgroup of expert contributors provided detailed input and feedback through the drafting, review and layout stages. ORM would especially like to thank expert contributors Cameron Weeks, David Heinjus and Phil O’Callaghan.
Maureen Cribb (manager Integrated Publications, GRDC) has provided invaluable guidance and ensured that the GrowNote is focused on meeting the needs of grain growers.
In addition, the case study videos, produced by Anvil Media, would not have been possible without insights from growers and their advisers about their experiences with various farm business models (Table 2).
GROWNOTES
Name Position Business Location
David Brownhill grower Spring Ridge, NSW Basil Doonan consultant Macquarie Franklin East Devonport, Tasmania John Francis consultant Holmes Sackett Wagga Wagga, NSW Simon Fritsch principal Agripath Tamworth, NSW
Rod Glass vice-chancellor’s research fellow
University of Southern Queensland Toowoomba, Queensland
Brian Gregg grower Dysart, Queensland
David Heinjus managing director and consultant Rural Directions Pty Ltd Clare, SA
Bec Lanham consultant Collaborative Farming Australia Wangaratta, Victoria
Phil O’Callaghan managing director and consultant ORM Pty Ltd Bendigo, Victoria
Andrew Rice agribusiness consultant ORM Pty Ltd Parkes, NSW David Sackett managing director Growth Farms Australia Borambola, NSW Brendan Tierney grower Moora, WA Simon Venus corporate lawyer Piper Alderman Adelaide SA Cameron Weeks director and consultant Planfarm Pty Ltd Geraldton, WA
Brian Wibberley principal and accountant Wibberleys Chartered Accountants Port Lincoln, SA
TABLE 2 Case study videos.
Name Position Location Business model
Simon Ballinger grower Wolseley, SA Family farm Scott Campbell grower Keith, SA Family farm
David Heinjus managing director and consultant Clare, SA Consultant
David Critch grower Mullewa, WA Leasing Alex and Helen Jobling grower Swan Hill, Victoria Share farming
Phil O’Callaghan managing director and consultant Bendigo, Victoria Share farming
Graham Mattschoss Yorke Peninsula, SA Joint venture Paul Schulz Sandilands, SA Joint venture Brian Wibberley principal and accountant Port Lincoln, SA Joint venture
GROWNOTES
FARM BUSINESS MODELS
IN FOCUS Farm business model versus business structure A farm business model is commonly mistaken to mean ‘business structure’, or the combination of legal entities for business operation and asset ownership, such as a partnership, trust or company.
While legal entities are important, they are only part of the puzzle and may not take into consideration the foundations for a successful farm business. The business entity is best addressed in the later stages of setting up or restructuring a farm business model, matching the entity to the needs of the business and people. Section 1.1 provides links to additional information on farm business structures.
SECTION 1
Introduction to farm business models The family farm business model, where the land is owned and operated by the family, has generally served Australian agriculture well. However, there are situations where internal contribution of the farm’s assets and operations will not deliver the best outcome for the business or the people involved.
Modifying the family farm model, or developing an alternative model to include some external contribution of assets and/or operations, can deliver greater flexibility and rewards. It may be as simple as tweaking the traditional family farm model to include contracting, through to developing more complex models such as joint ventures.
The technical aspects of running a farm, including crop and pasture agronomy, livestock husbandry and grazing management, are the key building blocks for a sustainable and profitable farm business. However, farm business management is the critical ingredient for success.
Successful farm businesses have two important components: they are profitable and, perhaps more importantly, they meet the needs of the people who own and operate them. Having the right farm business model in place is the first step to achieving success in both.
Family farms, where most or all farm resources are owned or provided by the family, are the dominant farm business model in Australia1. Worldwide, agriculture is the only major production sector still predominantly based on the family business model 2.
Statistics suggest the demographics are now changing. In Australia, there is an increasing number of ‘family corporates’, or large family farm businesses that operate with a formal board and administrative structure with employed staff. In comparison, ‘true corporate’ farm businesses are companies with shareholders and a board structure. Although the number of ‘family corporate’ and ‘true corporate’ farms is still relatively low, their relative contribution to agricultural production is significant3.
VIDEO

GROWNOTES
6.1.1. Australian grains industry at a glance
6.1.2. Relative contribution of family farms to Australian agriculture
6.1.3. Changing demographics of Australian farm businesses
6.1.4. Family farms – the situation in the European Union37
6.1.5. Partnerships are the most common trading entity for farm businesses
What is a farm business model? A farm business model involves arrangements for:
• business ownership and access to resources; • business management; and • sources of capital for the business.
Examples of farm business models include leasing, share farming, family farms and joint ventures.
There are many reasons why a grower or ‘farm business operator’ may consider changing their farm business model. The most common drivers for change include:
• increased profitability by improving cost structures and access to resources; • greater risk management through sharing risk with other parties; • facilitation of business succession; and • increased access to capital for growth and operation, reducing the reliance on debt
funding.
These drivers are explored further in Section 2.1.
While adopting an appropriate farm business model can help address these drivers, business success also depends on the ability to manage and operate the business well. Traditionally, family farms owned all assets and provided all or most of the resources for operating the business, including land, water, labour, management and working capital. Alternative farm business models provide an opportunity to vary this model to include the contribution of resources from:
• other farm business operators and service providers such as contractors; and • investors, including landowners not operating their own farm businesses or passive
investors offering capital for business operation and growth.
It is essential that the perspectives and needs of all farm business operators and investors are considered when developing farm business models. Models can be customised and multiple models may be included in a business at any one time.
This GrowNote aims to assist growers in assessing their current business model, including their:
• personal and business circumstances (Section 2); and • farm resources (Section 3).
It then guides them through:
• alternative business models (Section 4)
to assess those that better suit their needs, based on the key considerations of:
• people; • finances; and • resources.
GROWNOTES
1.1. Useful links and additional information – farm business management
GRDC Farm Business Management resources – www.grdc.com.au/Resources
Krause M (2014), Farming the Business Manual, GRDC, Canberra – www.grdc.com.au/Resources/Publications/2015/01/Farming-the-Business-Manual
Crowe Horwath (2014), Business structures for a successful family farm – www.grdc.com.au/Research-and-Development/GRDC-Update-Papers/2014/10/Business- structures-for-a-successful-family-farm
Wibberley B (2014), Business structures for the family farm – www.grdc.com.au/Research-and-Development/GRDC-Update-Papers/2014/09/ Business-structures-for-the-family-farm
Videos www.youtube.com/playlist?list=PL2PndQdkNRHEJ9OAMJOxlCn53Yh64lOhs
GROWNOTES
SECTION 2
Assessing your current farm business model Alternative farm business models cannot be selected ‘off the shelf’. They need to be developed to suit specific personal and business needs, focusing on people, finances and resources.
The following steps can be used to better understand your personal and business situation, identifying where changes are required that may be accommodated by an alternative farm business model.
• Step 1 – 2.1. Step 1 – Why change the current business model?
• Step 2 – 2.2. Step 2 – What do the key people in your farm business need?
• Step 3 – 2.3. Step 3 – What stage of the business cycle are you…