EXPANDING beef country holdings still presents as a leading investment option for the increased working capital in farm businesses courtesy of two solid years of record cattle returns.
However, that is for producers who have exhausted efficiency gains as dollars allocated to productivity improvements will always be the best spent, consultants say.
The combination of low interest rates, very good returns and the belief rural property values are still on the same upward projectary they have been on for the past year means there is still solid value in buying additional land to run cattle.
It’s a very different environment to what existed five years ago and has underpinned the distinct shortage of properties available for purchase and ensuing rise in prices.
Agents put the average hike in rural property value across the East Coast at 20 per cent over the past year. In Queensland, beast area values have hit new highs, trading above $6000 in the central regions and a whopping $10,000-plus in the south.
Farm business consultant John Francis, Director of Holmes Sackett, Wagga Wagga, said the challenge in opting to put beef capital into additional land acquisitions was picking the timing of rapid growth in land prices.
“If you miss the spikes like the one in 2003 and 2004 then the opportunity cost on wealth creation can be high,” he said.
Secondly, while it is the case that the more profitable you are, the easier it is to service the debt, producers still have to be good at what they’re doing.
At the moment, most producers in this position would be borrowing at a rate below capital gains and operating gains, which is the key to leverage.
That is an unusual and very positive position to be in, Mr Francis said, however “the fundamentals still have to be right.”
“Commodity price spikes are just that, what goes up will come down,” he said.
“Yes, expansion is better than reinvesting capital on farm in many cases at the moment but the caveat is it depends on how good you perform on farm.
“In order to understand if you are capable of expanding, you need to know what your historical farm business performance is like - that is where comparative analysis comes in. Understanding your business is critical.”
Rural property expert Col Medway, CBRE Agribusiness, said with profits per hectare among the top 20 per cent of beef producers in excess of $600 per hectare in the past 12 months, the argument for expansion was strong provided the producer could maintain that level of efficiency.
Russell Lindley, rural property sales at Ray White Rural Emerald in Central Queensland, said there was currently a lack of opportunities to expand and more buyers than sellers.
“All the properties we’ve sold this year were beef and grain producers acquiring more land,” he said.
“They want to get bigger, their eyes are on the future.”
Analysing capital investments will be a key feature of Business Edge workshops, run by Holmes Sackett in conjunction with Meat and Livestock Australia, in Gundagai on June 19 and Wagga Wagge on June 22 and 23 and Dubbo on June 28 and 29.
Don’t destroy wealth
AVERAGE Australian beef prices have run in ten-year trends, according to consultant Phil Holmes, who has specialised in northern cattle businesses in recent years.
What the cycle shows is that 75 per cent of the money made in a decade is made in just three years.
It was very important to capture those three years, he said.
Was there fundamental change in what was happening now and are we in for a new era of prosperity?
Probably not, Dr Holmes says.
“However, there is certainly working capital in the system and how we allocate that rationally and effectively for future prosperity is the important question,” he said.
One of the key points in determining if a beef business was sustainable in the long run was the relationship between business return and the cost of capital, he said.
The business return has to exceed the cost of debt, otherwise you are destroying wealth, Dr Holmes said.
“Unless your level of equity is about 85pc the business will be unsustainable in the long run simply because after you have paid the interest out there is not enough money left over to do all the provisioning for the future,” he said.