BEEF producers across Queensland have generated an annual return on asset value averaging just 2.6 percent over the past decade, and about half have spent more money than they have earned in six of the past seven years.
That's a couple of the sobering statistics to emerge from an important new economic study of the northern Australian cattle production sector released last week.
A key counterpoint to these figures, however, comes in the financial performance of the top 20 percent of Queensland producers analysed in the same study.
While they are not reaching the lofty highs seen a decade ago, they continue to perform strongly - producing an average return on asset value of 8.53pc/year.
That's competitive with current bank deposit rates.
Results like this can provide a rallying point for broader industry improvement, with the opportunity to take some cues from the key features identified as drivers behind the 'Top 20pc' businesses.
These and other important findings are contained in a business management study conducted for MLA recently by agribusiness consultants, Terry McCosker and David McLean, Resource Consulting Services and Phil Holmes, Holmes and Co.
Messrs McCosker and McLean benchmarked productivity and profitability across almost 100 enterprises in four regions of Queensland (northern speargrass, Mitchell grass, brigalow and ironbark zones), while Mr Holmes similarly analysed financial positions in the Katherine, Central Australia and WA Pilbara regions.
Their research clearly showed that profit maximisation among the enterprises studied is a function of both minimising costs and optimising production.
Enterprises that maximised profit did not rely on prices received, had slightly higher production per large stock unit (LSU), lower stocking rates when adjusted for rainfall, significantly higher gross margins and significantly lower overheads in their business.
The major issues facing the industry, as identified in the study, include inadequate scale in the more closely settled areas in Southern Queensland, significant cost escalations in both overheads and direct costs, and a doubling of debt per LSU over the past decade.
The overall findings revealed a steady decline in return on assets over the past 10 years, influenced by a range of internal and external factors. The external impacts included:
- The significant increase in land values (the grazing property index has increased at least 250pc from 1999 to 2008) which has both induced and encouraged higher debt.
- Below average rainfall across the Queensland study group for seven of the last 10 years, which has impacted on cost of production.
- Beef prices generally increased until 2004, then levelled-off and have declined in the study group in the last two years. However, significantly, price received has not been a consistent driver of the difference between the top 20pc group, and average producers.
- Legislation around vegetation management has impacted both development and maintenance options for producers in affected regions.
Some of the internal impacts on ROA performance identified in the study included:
- Scale has been shown to be a major contributor towards profitability, and the effects are amplifying. The Queensland region data indicated that at the beginning of the decade, 1123 LSU were needed to maintain overheads at $80/LSU. At the end of the decade, the corresponding number was 2405 LSU.
- Overheads per LSU have risen by 54pc over the decade, while direct costs per LSU have risen by 150pc over the same period (which is a combination of both cost and use).
- Expense ratios (total expenses including interest/gross product), have been over 100pc in six of the last seven years for average operations, meaning they have spent more than they earned.
- Finance ratios (finance costs/gross product) have reached 20pc for average businesses, which means 20pc of all income is paid-out in interest and finance costs. This is an economically dangerous position to be in when average ROA is 0.3-2pc.
- The extremely poor performance of the extensive breeder herd in some regions was another large contributor to poor business performance.
The project authors also provided some key recommendations for the northern beef industry, on the basis of their findings.
The first was the need to analyse the business to understand where the issues were in terms of turnover, overheads and gross margin. Identifying the primary driver that would most impact on profit would allow the producer to see what could be changed to deliver improvement, they suggested.
After analysing the business, strategies should be developed to overcome weaknesses specific to each business, before it was too late.
The authors also urged producers to understand the implications of attempting to lift stocking rate above the carrying capacity. The initial focus should be on what could be done to sustainably lift carrying capacity.
In the extensive breeder regions, there was a need for renewed focus on heifer management, breeder performance and bull selection based on objective measurement.
It was also important to ensure bull selection was appropriate and accounted for the pressure likely to be incurred within a given breeding system.
Producers in all regions were urged to continue to develop their business management skills and capacity.
* Visit the MLA website for a full copy of the report.
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