The volatile crop inputs sector has hogged the headlines in terms of high costs and potential threats to farm profitability but an agribusiness specialist has told farmers a bigger threat may lie in the machinery shed.
"Fixed costs are an emerging issue," said ORM agribusiness consultant Ben Hogan at the Grains Research and Development Corporation (GRDC) update in Bendigo last week.
"Rising input prices have been put under the microscope in recent years, but based on a full year 2023 estimate embedded farm business costs such as machinery capital expenses and financial costs may be the bigger threat to profitability," Mr Hogan said.
He said that input costs generally created a more immediate boost to income than machinery, mitigating their occasional high costs.
"In the research we found correlation between inputs and income, not only within the volume of inputs against yield, which is probably to be expected but also in terms of grain prices and the price of inputs."
The application of inputs can also be more closely tailored to the season meaning costs can be cut in years of poor yield potential.
On the other hand, fixed costs such as machinery are not so flexible.
Mr Hogan said with farm sizes increasing, machinery had followed suit and was now large, complex and expensive.
"Machinery costs moved from 13 per cent of gross income in 20202 to now an estimated 20pc or even higher in the case of an average income year."
With further issues surrounding machinery supply chains and manufacturing costs he said there was no reason to expect machinery prices to come back.
Further to that changes to favourable tax regulations, such as the instant asset right-off would also make it more difficult for growers to manage their machinery costs.
"Fundamentally, the plan has generally been to replace equipment when the finance runs out and keep rolling it over, but when the prices are getting up to $200/ha it becomes difficult to maintain."
"People are adding balloons and going over these time frames a little but you want to keep some equity in your gear so there is not necessarily a lot of room to move."
"At present people in this part of the world at least are coming off a run of high income years and we've also seen some really strong equity growth which has put in place some good financial buffers."
However, he said more embedded fixed costs would present an issue, particularly with a return to lower income seasons.
"Machinery decisions are going to have to be strategic, people will want to own those really important pieces of equipment but will also have to consider contractors for other operations to help keep costs down where possible."
On the inputs front, he said there could be particularly volatile costing when taken on an annual basis, but over three year periods the costs smoothed out markedly.
"For instance the input spend for 2022, when fertiliser prices jumped, was 105pc higher than 2013, but when taken as part of a rolling three year average that figure dropped to 56pc above 2013.