Peter Martin, Walter Shafron and Paul Phillips
- Broadacre debt is estimated to have increased by 7 per cent during 2015–16 to average $560,500 per farm at 30 June 2016.
- Dairy industry debt also increased by around 7 per cent to average $937,600 per farm.
- Most new borrowing during 2015–16 for broadacre and dairy farms funded new on-farm investment.
- Farm business equity on average is strong for broadacre farms. The average equity ratio for broadacre farms at 30 June 2016 is estimated at 88 per cent, an increase from 87 per cent at 30 June 2015.
Debt is an important source of funds for farm investment and ongoing working capital for the broadacre and dairy industries, because more than 95 per cent of farms in these sectors are family owned and operated. Funding by family farms for expansion and improvement is limited to the funds available to the family, the profits the business can generate and the funds it can borrow.
Nationally, total indebtedness of the agriculture, fishing and forestry industries to institutional lenders increased by 77 per cent, from $42.0 billion at 30 June 2001 to $74.3 billion in real terms at 30 June 2009. Total rural debt subsequently declined in real terms to $68.5 billion at 30 June 2015 before rising to $69.5 billion at 30 June 2016. Bank lending accounts for around 95 per cent of total institutional lending. Bank lending declined from $66.9 billion at 31 December 2009 to $64.4 billion at 30 September 2015 before rising to $67.9 billion at 30 September 2016 (RBA 2017a, b).
Change in farm debt over time is the balance between the amount of principal repaid and the increase in principal owed (new borrowing). The increase in broadacre and dairy industry debt is the result of increased borrowing together with reduced loan principal repayments through much of the 2000s.
Lower interest rates from the late 1990s and increased lending fuelled the boom in land prices. This raised farm equity (net wealth) and induced lenders to provide more finance. This continued until a correction in land values in some regions after 2009 and a tightening of lending practices by banks in recent years. Provision of interest subsidies to farmers in drought through exceptional circumstances arrangements supported debt servicing. In many regions this assistance was sustained for most of the 2000s.
Several factors in addition to lower interest rates contributed to the growth in debt over this period. Structural adjustment resulted in broadacre farmers changing the mix of commodities produced and increasing farm size. An increase in the average size of farm enterprises resulted in higher borrowing for ongoing working capital. Factors that contributed to increased working capital debt included movement away from less input-intensive wool production into more intensive cropping, changes in grain payment methods, higher variability in crop incomes compared with livestock incomes and movement to more intensive production technologies involving greater use of purchased inputs such as herbicides.
Loan repayment slowed and borrowing to meet working capital requirements increased during the 2000s drought. Working capital debt accounted for 30 per cent of the increase in average farm debt for broadacre farms between 2000–01 and 2014–15.
Average broadacre and dairy farm debt more than doubled from 2000–01 to 2014–15, mainly resulting from an increase in average farm size. The increase in average debt per farm was modest relative to the increase in average cash receipts per farm (Figure 1 and
Figure 2). Borrowing increased most for land purchase and on-farm investment. Borrowing for ongoing working capital also rose in line with increases in average farm size and greater mechanisation and intensification of enterprises.
Borrowing to fund new on-farm investment, particularly the purchase of land, machinery and vehicles, was the largest contribution to the increase in average broadacre farm debt. In particular, debt to fund land purchase accounted for the largest share (an estimated 52 per cent) of the increase in average debt for broadacre farms between 2000–01 and 2014–15.
Growth in average debt for broadacre farm businesses slowed between 2009–10 and 2013–14 as a result of a reduction in new borrowing and continued debt repayments.
However, average farm business debt is estimated to have increased for broadacre and dairy industry farms in 2015–16. Broadacre debt is estimated to have increased by 7 per cent during 2015–16 to average $560,500 per farm at 30 June 2016. Dairy industry debt also increased by around 7 per cent to average $937,600 per farm (Figure 1 and
Most new borrowing during 2015–16 for broadacre and dairy farms funded new on-farm investment (Figure 3). The proportion of new borrowing to cover operating expenses was higher in the dairy industry (23 per cent) than the broadacre industries (19 per cent). This was partly a result of lower farm cash incomes in 2015–16 for many dairy farms. However, a higher proportion of borrowing for operating expenses is common for more intensive farm enterprises.
Farm business equity on average is strong for broadacre farms (Figure 4). The average equity ratio for broadacre farms at 30 June 2016 is estimated at 88 per cent, an increase from 87 per cent at 30 June 2015. Around 82 per cent of farms had equity ratios exceeding 80 per cent at 30 June 2016.
The decline in land values from 2007–08 to 2013–14 reduced farm equity in some regions and prompted financial institutions to tighten lending. This restricted access for some farm businesses to more finance.
In pastoral and other regions of northern Australia, farm equity fell significantly over the five years to June 2014. This was mainly a consequence of reported reductions in land values. However, farm equity strengthened in other regions because of reduced farm debt and increased capital investment.
Farm equity for many beef and sheep farms increased with the general rise in prices for beef cattle and sheep in 2014–15. Farm equity is also estimated to have increased with small increases in land values in high rainfall and pastoral regions in 2014–15 and 2015–16.
The average equity ratio for dairy farms nationally has declined since 2004–05 as debt levels have increased with increased herd size and milk production. This is particularly the case in regions with increased focus on dairy production for export, including Tasmania, western Victoria and South Australia. The average farm equity ratio for dairy industry farms at 30 June 2016 was 79 per cent, down 1 percentage point from 30 June 2015 and around 7 per cent lower than in 2004–05.
Change in farm equity ratios over time should also be considered against the background of the increase in average farm size. Equity ratios are typically lower for larger farms because they are generally able to service larger debts.
Distribution of farms by debt and equity
The proportion of broadacre farms with relatively high debt varies across jurisdictions and industries (Table 1 and Table 2).
Around 36 per cent of broadacre farms in Western Australia and around 30 per cent of those in the Northern Territory carried more than $1 million in debt at 30 June 2016. The high proportion of farms with debt exceeding $1 million reflects a high proportion of larger businesses in those jurisdictions.
Similarly, around 35 per cent of wheat and other crops industry farms and 31 per cent of dairy industry farms nationally carried more than $1 million in debt at 30 June 2016. Both industries have a high proportion of large farms.
In contrast, 69 per cent of beef farms and 63 per cent of sheep–beef farms nationally were recorded as having debt of less than $100,000 at 30 June 2015. Many of these businesses are small.
Much of the aggregate broadacre sector debt is held by a relatively small proportion of mostly larger farms. At 30 June 2016 around 70 per cent of aggregate broadacre sector debt was held by just 12 per cent of farms. On average, these were large farm businesses and in aggregate they produced around 50 per cent of the total value of broadacre farm production in 2015–16.
Aggregate debt is slightly less concentrated among larger farms in the dairy industry. Nevertheless, around 70 per cent of aggregate dairy sector debt at 30 June 2016 was held by 30 per cent of farms.
For the broadacre industries, the proportion of net farm income (total farm cash receipts less total cash costs excluding interest costs) needed to fund interest payments rose substantially between 2001–02 and 2006–07. This resulted from a large increase in farm debt and reduced farm receipts after extended drought conditions. Interest rate subsidies (paid to farm businesses as drought assistance) partially offset the increase in interest paid over this period.
Higher net farm income since 2009–10 and reductions in interest rates resulted in a decline in the average proportion of net income needed to fund interest payments for broadacre farms (Figure 5).
Large increases in borrowing through the 2000s and a reduction in net income between 2007–08 and 2013–14 resulted in the proportion of net income needed to fund interest payments being high for the beef industry (Figure 6). The proportion of net income needed to fund interest payments peaked at just over 60 per cent in 2007–08 as northern beef industry farms commenced rebuilding herds after the end of the 2000s drought. The proportion trended downwards to 18 per cent in 2015–16 and is projected to remain at around 18 per cent in 2016–17. This is similar to the proportion recorded in 2001–02, when beef cattle prices were also historically high.
In 2016–17 the ratio of interest payments to net farm income is also projected to be historically low in the wheat and other crops and sheep industries, at around 16 per cent for both.
For the dairy industry, the proportion of net farm income needed to fund interest payments increased very sharply in 2002–03, 2006–07 and 2012–13. Dry seasonal conditions and low milk prices resulted in very low net farm incomes in those years (Figure 7). In 2016–17 the proportion of net farm income needed to meet interest payments is projected to increase to 33 per cent for the dairy industry nationally and to around 36 per cent in Victoria.
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Broadacre and dairy industries data
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Beef, lamb and sheep industries data
A large selection of ABARES farm survey data on the beef, slaughter lambs and sheep industries.
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About my region
ABARES has produced a series of individual profiles of the agricultural, forestry and fisheries industries in your region. Each regional profile presents an overview of the agriculture, fisheries and forestry sectors in the region, and the recent financial performance of the broadacre and, where relevant, dairy, vegetable, and sugarcane industries.