Red meat sector confidence high, but lifting the average would seriously enhance earnings

The Rabobank Rural Confidence Survey conducted in November found confidence among sheep and beef farmers had risen from just under 50% to 75% since the previous survey the previous quarter. However the overall confidence level remained low because of pessimism among dairy farmers, although this was slightly better than the two year low in the previous survey.

 

Sheep and beef farmer confidence is now on a par with dairy farmers’ confidence about their outlook and consistent with the situation two years ago. Major reasons for the turnaround are not difficult to fathom, but apart from the contrasting price trend for the respective products, half the farmers surveyed were optimistic about the outlook for global red meat demand.

 

The relative investment intentions of the two sectors also bore out the levels of optimism with 41% of sheep and beef farmers intending to invest more in their farms compared with just 18% of dairy farmers.

 

Another interesting paper released last week was the ANZ Agrifocus for December, in which the feature article assessed the secrets of top performing red meat farmers. The Red Meat Profit Partnership, jointly funded by government and industry as one of the projects in the Primary Growth Partnership Programme, has examined the key attributes of the top farmers in the red meat sector.

 

Finding out what success looks like and identifying key drivers are crucial first steps towards achieving the goal of lifting overall sector performance. According to the paper in-depth interviews of top farmers found a range of key attributes, with the main ones including:

 

  • Vision and drive, well-defined personal and business goals.
  • Having the right skill set and a talented team, as well as using specialist advice when required.
  • Above-average execution of key farm management practices and mitigation of risks.
  • Passion and confidence in the sector, which drives investment and effort.

 

A fascinating piece of information from the analysis is that top performance is similar across different farming types, while productivity does not automatically lead to profitability. Therefore it is the ‘soft’ attributes listed which actually make the difference between top and mediocre performance, rather than the obvious ‘hard’ factors of stock numbers, debt and financial management.

 

The overall goal of the RMPP is to get past the apparently inevitable 80/20 rule which has seen the performance gap between the top performing 20% and the rest blowing out to between two and three times the respective profitability levels. It is estimated that sector pre-tax profits would lift by $640 million if that ratio were to change to 50/50 i.e. a further 30% of average farmers lifted their performance into the upper bracket.

 

Delving deeper into the detail shows the discrepancy becomes more marked when comparing the performance of hill country farm enterprises as distinct from those farms on better country. An analysis of the EBITR (earnings before interest, tax and rent) underlines the performance gap between the average and top performers.

 

According to the findings ‘For the last five years the average earnings before interest, tax and rent (EBITR) was $240/ha on the average farm which provided a measly return on total capital employed of just 1.1%. Over the same period the top 20% achieved average EBITR around the $500/ha mark, with many more yielding above $750/ha on a regular basis. This translated into a return on total capital employed of 4-7.5% for many of the top performers.’

 

This suggests the focus on industry structure as a means of solving the red meat sector’s perceived problems may actually be barking up the wrong tree.

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