By Dr Phil Holmes
An abridged version of this article was first published on the FarmOnline website
‘It’s not sustainable’! How often do you hear that statement? Sometimes the meaning is quite obvious, like contemplating human life without oxygen or water. However, more often than not it is vague, sometimes bordering on being meaningless. Unfortunately, this can lead to cynicism and a loss of the potential benefits that a good understanding of modern sustainability thinking can deliver.
Where do you sit with this? Would you like to think that your farm business is truly sustainable, or is it not on your radar? Think about this; if having a multi-generational farm business is your objective, the business absolutely must be sustainable, otherwise the kids will be handed a sentence rather than an asset!
Crossing the barrier into a world of true long-term comprehensive sustainability with a farm business is not easy, but it can be done. The barrier is entirely mental. If you think it is important and want to do it, it will happen. There is no rocket science; it is all about how committed you are to learning how to do it and what the word ‘sustainability’ really means. It is entirely up to you, nobody or nothing else.
A major advance was made in 2005 with respect to the thinking on sustainable Australian agriculture, when various forms of capital were described by Chris Cocklin and Jacqui Dibden. Two of those forms of capital are arguably more important, because they are under the direct control of management and, unless they are sustainable, the other forms are largely rendered irrelevant on a national scale. Those two forms are ‘Natural’ (the health of the farm environment at paddock level), and ‘Produced’ (the financial health of the farm business as a result of how well it is managed).
Natural and Produced capital are critical because they both have the inherent capacity to bankrupt an agricultural business if mismanaged, particularly a grazing business. Arguably, the path to bankruptcy through business mismanagement is shorter, and for no other reason than this, the financial sustainability of the business should be given primacy. This is a complex issue when considering the sustainability of Natural and Produced capital because the two are intimately linked, especially in rangeland pastoral businesses. In fact, the aim to achieve sustainability in both concurrently must often deal with mutually exclusive antagonism, particularly during drought.
I learned this lesson with my PhD study which asked the question of whether concurrent environmental and financial sustainability is possible in a farm business. Yes it is, subject to a change in thinking, which unfortunately is not happening enough in Australian farm businesses.
The issues involved with financial sustainability are easier to measure and less controversial. The cash is either in the bank, or it isn’t. Environmental sustainability is a little more complex, but well within the grasp of anyone with the necessary interest and commitment. The evidence is that nationally, the Natural bank has been propping up the Produced bank. This is truly unsustainable.
In a recent large-scale study, Ian McLean and I employed a sustainability approach to examine the status of the Australian beef industry at the producer level. The results of this study are published in The Australian Beef Report. Twelve years of historical data were used from every beef producing region in Australia. Consistent with the requirements of sustainability theory, we proposed a set of definitional criteria for financial sustainability that have withstood scrutiny. To be financially sustainable in the long term, an Australian beef business needs to answer the following questions favourably:
- Does the total business return exceed the cost of capital? For almost all family owned beef businesses, the cost of capital is the cost of debt plus charges. If you do not know how to calculate your total business return, then that may become your first learning exercise.
- Does the business fund all operating expenses and operational capital expenditure from internally generated working capital? If it doesn’t, that is not a good scene. It
takes less than five minutes to check this if you know how to do it.
- Does the business remunerate the owners adequately for their management expertise? Want to get a shock? Go to the ABS website to see what the average full-time male and female wage earners bring home annually and compare that to your drawings.
- Does the business have the capacity to repay debt principal in a timely manner? Debt costs, but it is not so much the interest rate, it is more about the time it takes to pay off the principal, the biggest cost. Set a limit for debt principal repayment to keep its total cost affordable. The term needed may surprise you.
- Does the business have a ‘safe’ level of equity? If you have too much debt, the interest payments consume so much of the cashflow that future liabilities remain un-funded. For most beef businesses, equity needs to be a lot higher than most people think in the long-term, in order to have enough working capital for adequate future funding.
- Does the business have enough operating scale to be sustainable without the need for off-farm income? Off-farm income is perfectly acceptable, so long as the owners recognise that the underlying farm business is financially unsustainable without it. Many don’t!
- Does the business have the inherent financial capacity to survive inter-generational transfer of ownership, otherwise known as ‘succession’? If this issue is on the agenda, it needs to be treated with caution and respect as it has the potential to kill businesses and families. It is more expensive than you think and financial provisioning must start early,
- Can the business fund the financial provisioning needed for the independent retirement of the departing generation? If the ‘oldies’ have to hang around after the ‘youngies’ have taken over, continuing to draw from the farm business account, succession is not complete.
- Finally, does the business comply with all of the above sufficiently to avoid environmental capital being used to prop up the financial position? In other words, do you have to flog the joint to make it all work out financially?
Based on these criteria, the majority of family-owned Australian beef businesses are not currently financially sustainable. Although there are a range of factors causing this, including lack of operating scale, the most important operational factor is the poor productive capacity of the beef herds, and hence their income earning potential. Although there are regional differences in average herd productivity, indicating that landscape productivity plays a part, most herds in all regions perform well below the potential shown by the minority of highly productive herds in those same regions. Sustainability, across the board is achieved by what goes on inside the head of the owner/manager, more than anything else.
Too hard you say, the criteria are too tough! Possibly so, but what would you change? Go through the list and add or edit as you see fit to create your own sustainability criteria to work towards. To be sustainable the bar needs to be set high though; can a business which cannot afford to pay its owners who work in the business an average wage, or which cannot afford to repay debt, be classed as truly sustainable? Whilst only a minority of producers can meet or exceed the criteria as they are, the important point is that it is being done.
The determination of financial sustainability is made simpler by the fact that the definitional criteria apply to any beef production business, irrespective of its location and as a result, are universal. This is not the case with environmental sustainability as location specific issues often demand different definitional criteria. Beef cattle can be, and are run between Cape York and Hobart, Byron Bay and Karratha. This geographic spread of production is unmatched by any other Australian agricultural industry. It is just not possible to produce a set of specific universal environmental sustainability
criteria for this geographic spread of operational activity.
However, it is possible to set an over-arching framework of tested principles to which specific location criteria can be added. In The Australian Beef Report, we broadly
classified the Australian beef operating environment into either Rangelands or More
Intensive Regions and we laid out the principles pertaining to both.
It is important to mention the issue of productivity. For a beef business to be sustainable across all fronts in the long-term, there needs to be a strong focus on productivity. Land, labour and livestock all need to be highly productive and here is a good example of the interactions that take place. You can have the best genetics and management available to potentially provide superb livestock productivity, but if the landscapes being grazed are degraded, that potential will never be achieved. Conversely, you may be grazing highly productive landscapes with very ordinary livestock which are poorly managed. Comprehensive sustainability in a commercial beef business mandates a multi-disciplinary approach.
This multi-disciplinary approach, and overall achievement of sustainability, will require significant intellectual capital across the industry. There is lots of commentary on the need for financial capital in the industry, and we address this in the report, however I think the industry needs to discuss the need for intellectual capital and better acknowledge the intellectual capital that is in the industry. Particularly amongst those
producers who are sustainable, and are quietly going about their thing.
I remain optimistic that industry sustainability can be improved, through individual producers rising to the challenge.