Drought increases debt burden for cattle producers – ABARES

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According to the ABARES report, Financial performance of beef cattle producing farms (2012-13 to 2014-15), jointly commissioned by MLA, the debt burden of drought affected properties across Australia increased 4% year-on-year in 2013-14, followed by another 4% increase in 2014-15. While this may not seem like a dramatic increase, there was wide variation within the group of drought affected properties and the increase was more significant for northern* producers.

ABARES estimate 28% of properties (this is the number of properties, not the area, hence, will be skewed by the greater number of smaller southern producers) were drought affected in 2013-14, up from the 7% in 2012-13. This number increased again, to 31%, midway through 2014-15. Most of these properties were located in northern NSW and Queensland.

Across Australia, properties that were drought affected in 2013-14 had:

While these figures may be skewed somewhat – as the drought affected farms were in areas where there are typically poorer branding rates, higher death rates and cattle are finished at lower weights – it illustrates the stresses drought puts on the business.

However, not all producers in drought affected areas increased their debt burden – 31% increased debt, 34% were unchanged and 36% decreased their debt level, in 2013-14. While taking on more debt can be a positive thing, as it can allow a business to expand, 54% of additional debt taken on by drought affected farms was to cover cash flow short falls. In comparison, just 30% of the additional debt taken out by non-drought affected producers went to covering cash short falls, while the remainder was invested back into the business primarily in the form of land or machinery and vehicle purchases.

Overall, ABARES reported that drought affected farms took on more debt and it was to cover cash short falls, rather than productive investment capital.

Increased debt impacts the business in two ways; it reduces the capacity to borrow more in the future and also increases the cost of servicing the debt. According to ABARES, both of these factors appear to have worsened for producers in northern Australia as a result of recent drought. As illustrated in Figure 1, in 2013-14 the proportion of northern producers with a greater than 15% interest-to-receipt ratio (those with a relatively high cost of servicing debt) increased, while the proportion with an equity ratio below 70% (those with relatively less capacity to take on more debt) also increased.

While the interest-to-receipt ratio subsequently fell in 2014-15, as a result of lower interest rates, the proportion of producers with low equity ratios continued to rise, to levels not seen since 1996-97.

In comparison, with a reduced impact of drought and a higher proportion of income from non-beef or off-farm sources, the impact of drought on debt in southern Australia was minimal, as illustrated in Figure 2. In fact, as interest rates have declined in recent years, the interest-to-receipt ratio has steadily fallen over time.

So what does this mean for cattle producers and the industry? Increased debt burden will continue to hamper a business’s capacity to rebuild.

It will be difficult for producers who already have high levels of debt, who destocked during drought and are now, or will be, looking to restock, given financial constraints. At the same time producers may continue to turnoff cattle, at what are historically high prices, to reduce their debt burden. Subsequently, the herd rebuild process may take even longer.

Given southern producers have a greater capacity to borrow more funds, in addition to average to above average rainfall across NSW so far this year, this also explains the current role of the NSW restocker as a major competitor in markets throughout the eastern states.

Interestingly, it is actually the largest northern producers (herd size greater than 5,400 head) that have the smallest equity ratio, 78% on average, and 28% of producers in this category have an equity ratio below 70%.

This may also explain, in part, the recent suite of large property sales and joint ventures across northern Australia, as producers with relatively high levels of debt look to leave the industry, while property prices are strong, or seek other avenues of capital to support their business.

For the full ABARES report, please click here.

*Northern properties are classified as being in Queensland, NT and northern WA. Southern properties are classified as being in NSW, Victoria, SA, Tasmania and southern WA.