Relying on bank debt as the main source of funding for farming businesses will likely limit the sector's future growth says the Australian Farm Institute (AFI).
Unlike farm businesses internationally, Australian farmers still rely almost solely on bank debt to pay for expansion and productivity improvements and cover seasonal running costs.
A newly-released AFI report has explored trends in funding and business structures within Australian farming, including alternatives to bank lending packages which are expected to be required to pay for the sector’s future expansion.
Farm bank debt has jumped from around $10 billion to $60b in the past 25 years.
While the proportion of gross farm income needed to service that debt has remained relatively constant since 1990 – at about seven cents for each dollar of income – inflation has eroded the real spending power of a dollar since then.
“Future growth opportunities for Australian farm businesses will require access to increased funding, and alternatives will be required to current models,” said AFI’s research general manager, Richard Heath.
“However, while alternative farm funding models have emerged internationally, this is not the case in Australia.”
He said bank debt may have sustainably paid for productivity growth in recent decades, but the capital required to fund further growth and increasing family succession demands would be be many times what had been borrowed in the past 25 years.
“There is feeling of urgency in the agricultural community to find alternative funding models,” Mr Heath said.
Alternative models typically used overseas included separating the ownership of farm assets from farm business operations, such as farmland leasing and rental models.
Other options included offtake agreements which provided crop and livestock loans for short-term operational funding, and equity-sharing arrangements such as share farming and share milking which enabled multiple parties have an equity share in the farm business.
He said the high risk levels experienced by Australian farms were probably a major factor limiting the growth in alternative funding options.
A healthy balance sheet with plenty of additional borrowing capacity was the best defence Australian farmers had to manage risk.
That contrasted with various risk management options available to overseas farmers, including crop and income insurance schemes that operate in North America, which made it easier for new entrants, and also providing the basis for alternative funding models.
Next week in Brisbane the AFI’s annual agricultural roundtable conference will include sessions looking at financing and funding options, including an address by Australian co-founder of US-based investment advisor, AgFunder, Michael Dean.
The conference will also host the launch of the Australian Farmland Performance Index which has been modelled on similar farm financial indices closely following US real estate values and farm profitability trends.
The AFI’s research has also examined why differences existed in overseas agricultural funding markets and what could be helpful to Australian markets.
It has also made six recommendations to government and the agricultural industry aimed at improving industry and government policies which impact on capital funding models.
Financial indicators, farm financial advice, crowd funding regulation, cooperatives, real estate investment trusts and supply chain contracts are addressed in the recommendations.
They are also spelt out in detail in the AFI’s report - “A Review of Farm Funding Models and Business Structures in Australia”.