Agriculture sue isn't what it used to be. Once many wheat & sheep farms had free range pigs although we never knew the term free range. It was a handy sideline and a great disposal item for getting rid of freshly dead sheep or lambs, seconds wheat or sheep offal left over from a rations slaughter. Things changed and the unmentionable stuff would hit the fan were those practices widespread again.
In it opportunities arose as that door closed.
Thing is with Agriculture, as tough and as tight as it is something hasn't changed.
There is still a future for farming, it is, as always, a matter of who has a future in farming.
Old timers will recall "Get Big or Get Out" which was misinterpreted by many as a clarion call to be as big as you possible could or sell up. Essentially many tried to get big and ended up doing both.
It resulted (along with other contributing causes) in us seeing a term in the Farms For Sale adverts that yelled "Economy of Scale". It still pops up now & then and is still heralded as some sort of financial safe harbour. What does it mean? It means, pick what you think is a good or great yearly earner for a person...$100,000 taxable, $500,000? Is half a million a good yearly taxable income for one owner? It means the farm is so big, you can achieve that huge taxable income after costs, but it doesn't mention ROI or Return on Investment. That is also kinda important and whilst you can ignore it for a long time, you can't ignore it forever. If its an ROI of .5% then your half a million a year is as bad as a huge loss, its poor use of your net worth and it means you're so risky close to a complete wipe out and losing everything if your equity isn't 100%.
I also recall the phrase "Crop to a profit, not to a Yield" and still today many farmers still talk yields, tonnes/hectare. Yes its a polite public number but it doesn't really reflect profitability. In the old language I recall some farmers were making good profitable returns on "7 bags an acre" and some in better country were needing 13 bags to break even. Now most years they made similar margins to the 7 bag guys but they had a heap more flopped out on the block at risk with the 7 bag guys with less tied up in machinery and had very high equity. Some of the 7 bag set were seduced by the higher yield prospects and got bigger. Some kept a constant eye upon the other metrics and stretched their turnover and maintained or increased their margins/ROI and did very well. Some made huge jumps in dollar turnovers, took their equity down to dangerous levels with huge borrowings into more land and high cost machinery. Some got big, some got out, some did both.
Opportunities - Yes they exist. They always will but you have to hunt them down and select with a discerning eye. In essence, nothing has changed. When buying investment homes I once read "Look at 100 houses, narrow it down to 20 & return for a 2nd and 3rd look to get a more detailed assessment, then scratch it down to 10, put an offer in on 5 of them, negotiate hard on 3 of them & buy one, the best deal of the lot" - seemed like a lot of work for one house but it was just being very thorough to get the very best earner.
Opportunities are the same, dream up a 100 ideas and whittle them right down. That's what innovative people do when they're investing their own money. If you get down to 5 maybe one is a pearler maybe the other top 4 will end up being pearlers years later when things change.
Without doubt, the 2 most effective and most important tools or pieces of equipment you can have on a farm are quite simply your brain and your calculator.
Asset classes - I'm told there have only ever been 3 and there will always only ever be 3.
Property
Shares
Cash
A good accountant told me once to balance it out and have fair proportions of each, don't specialise on one only. When asked what was a "fair" ratio he said it'll vary and it'll also change with circumstances. But aim at 1/3rd if you can.
Connected to that in a separate conversation a lady from Jerramungup I met once was talking about farming and I asked her "I grow grain and wheat, what sort of business do I have?"
She thoughtfully said "Well you're in the textile and food business I guess, you're a farmer, you're in Agriculture"
I said "I disagree, I make my living from wheat & sheep, that's my day to day living but the biggest asset I have is the land. I'm in the real estate business. If I own a rental its the same, I might make a living being a land lord but essentially I'm in the real estate business"
It clicked with her and resonated. Its something farmers should think about deeply. Where is their net worth spread? All in the farming business with 4% in cash, 20% in cash or...?
Can you imagine having $5million in a farm, $5million in shares and $5million in cash? Ahhh personally I can't, but if I were on a broad acre farm still THAT would be the aim. It would take a long time getting there, it would take some innovative and at times brave decision making but time does help.
If you did make that magic mix at that magic level it doesn't take a lot to realise you now have an awful lot of passive income at your disposal. 2 of the asset classes, shares and cash, can be moved and converted fairly easily, fairly quickly, especially compared to property. In any case increasing your equity is a big aim, so is increasing your margins, your profitability.
And some people still chase big yields, big turnovers and ignore the fundamentals.
Its worth stating I think the more off farm income you have the better and I never understood why governments didn't try to encourage or reward those who did aim to build off farm income. If ever there was a rewarding way to drought proof the farm that's it.
Many farmers will never get there, but I think the lofty idea of having a minimum of 1/3rd of your income coming from off farm is a good idea. In any case, making every post a winner is essential but if its all work, hard graft and stress...you're doing it wrong.
Interesting to see how many people have dreams without plans.
No comments:
Post a Comment