Our Mining industry these days contributes four times the value to our GDP than its sister primary industry, Agriculture, Forestry and Fishing.
The Agriculture, Forestry and Fishing industry contributed just over 2% of our annual wealth (GDP) as we closed out the first decade of the new century in 2010. Only three industry divisions are smaller: Hospitality; Other Services (e.g. police, prisons, household services); and Cultural and Recreational services.
There was a time (around 1820) when the Agriculture, Forestry and Fishing industry was almost half the nation's GDP. Indeed, 100 years ago this primary division still contributed 29% of our GDP, easing to 23% by the middle of the 20th century, then halving that share in a single decade on the way to near oblivion five decades later.
Of course, if we follow the input-output flow downstream from agriculture through manufacturing to wholesaling and retailing, to hospitality and exports, then the entire agribusiness chain generates almost 10% of the nation's GDP and about 11.6% of the nation’s $3.8 trillion revenue.
The second chart traces the chain for food agriculture alone (omitting fibres, forestry and other non-food). The extra value added belongs to the downstream industries, not agriculture, given that most of that value adding could be done with imported agricultural products if ours ceased to exist. God forbid, as they say. Yet it is sobering to think that if the entire Agriculture industry disappeared it would be an emotional catastrophe, not an economic one.
Over three-quarters of the Agriculture industry involves food production. In 2011, the industry's revenue is estimated at $57 billion, of which agricultural food accounts for 72.2% and fishing 3.9%. If the industry's outsourced services (e.g. ground preparation, repairs and maintenance, harvesting) are taken into account, the agricultural share rises to over 82%. The balance of the industry is in fibres (e.g. wool, cotton), stock feed, forestry and other activities.
Big changes are taking place in the industry across five fronts, as summarised in the third exhibit.
Many of these changes have led to high productivity growth, and indeed the Agriculture industry has led the way against all other industries in the economy (5.0% per annum versus 1.8% per annum for our GDP) over the past few decades.
This hasn't helped the industry to be profitable, unfortunately, as most holdings are too small, land values are unrealistically high and, to a small extent, overseas subsidies of agriculture keep prices artificially low. The fourth chart shows the low returns for the industry over recent decades.
It is a story of more pain than joy. The ROSF (net profit after tax on net assets) has averaged a paltry 1.8% over this period, when the average SME return has been over 13% across all industries. Even with a healthy capital gain (5.4%) on the value of the land and other assets, the total return was barely half average SME profitability without capital gain.
So, how to make the industry profitable? Farming has well and truly become a way of life, rather than a business, and this helps explain the growing reluctance of Gen X and Gen Y in particular to opt to stay on the farm or even inherit it. Earlier generations may have done well enough on today's farms, but not the current generation.
The Agriculture industry may well have to pass through the same sort of revolution that our Mining industry did in the 1960s, which saw the birth of new corporations with very different financial and operating structures.
The Agriculture industry is forecast to have some $430 billion invested in 2012 (net $350 billion after debt) to produce revenue of about $60 billion or less. It is not possible to be adequately profitable with revenue of just 13 cents to 14 cents for every dollar invested, from which to pay for supplies, labour and other costs, and expect a best-practice return of 20% to 25% after tax. A new solution will be gut-wrenching for many, and anathema to others. But when the industry has come down to barely 2% of the nation's output, from a level of over 15% of GDP 60 years ago, there are some clear messages.
The final exhibit points to some guidelines for farmers, many if not most of whom would find the sixth 'commandment' the hardest and would love to have a solution to the fourth (if they operate in uncertain growing areas in terms of water, be it groundwater or rain).
But if we are to have an Agriculture industry as vibrant and profitable as our Mining industry is currently, then we will need to be thinking of corporate-size endeavours with massive acreage, guaranteed water, long-term market arrangements and revenue in the tens if not hundreds of millions each year. Franchising would provide economies of scale to smaller, semi-independent operators or family farms, where such arrangements make sense.
As it now stands, we have holdings in the low thousands of acres, with average revenue of less than $400,000 per annum on assets over $2.5 million - barely one-third of the revenue of a modern convenience store that has a few hundred thousand dollars invested, and where the franchisee takes home more income each year than the average farmer.
There has to be a new approach: the old one isn't working anymore.
Source: Phil Ruthven IBISWorld Pty Ltd, Melbourne, VIC 3000
