Strong beef prices are driving returns for farm business that have improved for the second year running. That’s according to accounting and business advisory firm Crowe Horwath, which has released the results of its annual farm benchmarking analysis ” and, despite challenges, it anticipates another strong performance for Hawke’s Bay agribusiness in 2016.
The Crowe Horwath benchmarking analysis enables farmers to monitor the performance of their enterprise over a five-year timeframe and benchmark against farms of a similar class. The reports include the company’s Analysis One tool that enables farmers to more visually compare results with others.
Notably, says Crowe Horwath Hawke’s Bay managing principal Rick Cranswick, the 2015 results demonstrate that, as in other businesses, flexibility and technology are essential to optimise performance.
“The top 10 per cent of farm businesses experienced less volatility in returns in comparison to all other businesses we’ve surveyed between 2011″2015,” he said.
“These farms have used good decision-making to generate superior returns, taking advantage of favourable market and climate conditions, whilst mitigating falling returns when faced with adverse climatic and market conditions.”
That flexibility is demonstrated in the farmers taking advantage of a buoyant beef market. “We’ve seen cattle ratios go up by some five per cent as the better returns offered by beef see an associated drop in sheep enterprises,” Mr Cranswick says.
He adds that the use of technology on farms is essential for improved planning, saving time, and supporting better decision-making. “We see the move in technology focused on data capture being more timely, leaving more time for farmers to work on strategic issues rather than getting caught up in the day-to-day operations. This isn’t just an external focus; our firm has existing technology platforms including our own Analysis One system to aid in benchmarking, setting and tracking KPIs.”
The major measuring statistic used by Crowe Horwath is the economic farm surplus (EFS), which is inclusive of wages but excludes interest and rent costs. “The EFS in 2015 was $377 per hectare, representing an increase of 47 per cent over 2014 results. This increase was primarily due to increased stocking rates and a greater exposure to beef, though it should be noted that strong beef revenues mask weakening demand for sheep meat and associated co-products.”
He adds that the better per hectare income achieved by the top 10 per cent of farms was achieved despite increasing debt levels and higher cost bases. “This indicates that more per hectare expenses and a higher gearing – more debt to equity – than the average, giving these farms a better return on assets of 7.9 per cent and a return on equity of 12.8 per cent for the 2015 year.
This also highlights that these operators are heavily investing back into their business to achieve above average returns.”
Margins per head, says Cranswick, also reflect farmers choosing to add extra weight to stock prior to sale.
While Crowe Horwath maintains a positive outlook for 2016, it anticipates softening of sheep and beef pricing which should be offset by the New Zealand dollar weakening. This, it says, should see 2016 incomes similar to those generated in 2015.
However, Cranswick adds that there is a potential for some downside risk to margins heading into 2016 due to an anticipated flow on affect as increased export prices transfer through to the store market pricing for replacement trading stock.
Return on equity:
Increased from 4.4 per cent in 2014 to 6.7 per cent; Total assets employed increased from $4.470 million to $4.594 million; Return on assets increased to from 3.19 per cent to 4.95 per cent.
Beef profitability remained at the upper end of the last five years surveyed, albeit softer than record results achieved in 2014; Margins driven by tight global supply coupled with strong demand and pricing; Prices to soften slightly in 2016, but offset against a forecast weaker NZD, should see similar returns to 2015.
Sheep and Wool:
Returns similar to 2014, but lower than 2011 and 2012; Sale volumes of lamb increased 11 per cent thanks to improved lambing percentage averaging 132.44 per cent (2014: 128.74 per cent); Softening market pricing for lamb in key export markets; Wool returns steady with pricing and volumes in line with the 5-year survey average; Overall wool auction price expected to increase 5-6 per cent in 2016 reflecting an improvement in global wool prices and a weakening NZD.
Servicing decreased to 14.2 per cent of GFI in 2015 from 14.7 per cent in 2014, reflecting improved Gross Farm Income and stability in term debt levels carried by farm businesses; Plant and vehicle values increased for the second consecutive year indicating replace and upgrade activity as discretionary income increases; Long term debt increased marginally over 2014 levels to $1.497 million with further investment taking advantage of lower term interest rates.
For further information, please contact:
Rick Cranswick, managing principal – Crowe Horwath Hawke’s Bay