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Farming The Future

The landscape is still shifting. The rolling green hills of Gippsland previously changed from temperate rainforest to prime agricultural land after Strzelecki roamed the countryside.

Apr 19, 2017

Words: Chris Leeson

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The landscape is still shifting. The rolling green hills of Gippsland previously changed from temperate rainforest to prime agricultural land after Strzelecki roamed the countryside. Now we see more rows of houses sprouting in the once productive fields. As our population grows are parts of Gippsland destined to become suburbs, further feeding Melbourne’s economy? But how are we actually going to feed Melbourne once we’ve paved paradise?

A recent special edition of Architecture Digest, titled, ‘Designing the Rural: A Global Countryside in Flux’ highlighted the fact that the city needs the countryside, both now and even more so in the future. Associate Professor Cole Roskam of Architectural History at the University of Hong Kong delivered this pertinent

…The reality that it is the urban that has always required the rural, which tirelessly and unsustainably supplies our industrialised landscapes with the food, water and energy they require to exist.

Finally, the type of astute recognition our rural regions deserve. Feel free to bust out the above sentiment the next time you’re in the midst of a condescending conversation with a city slicker who slyly questions the value of our ‘quaint’ country towns. The Prof then goes on to suggest that, “…the rural should figure as an active and prominent agent…” as we move into the future – a future that must be more self-restrained and grounded.

The management of long- and short-term costs and benefits is primarily a question of economics, and secondarily, but probably more importantly, a sustainability issue. Sustainable development meets the needs of the present, without compromising the ability of future generations to meet their own needs.

Australia has sterling global reputation for high-quality and premium produce, especially for food and beverages. As a nation, we currently command approximately 3% of the international food market. Gippsland, like the Yarra Valley, Mornington Peninsula and even Tasmania, has a reputation for first-class produce; so why is it that our farmers – the backbone of our community – are seemingly facing under-investment and a lack of support.

After recently undertaking an internship with a large Australian bank that delved into investments in agriculture, I developed the following list of concepts that are having an influence on food production in Gippsland. These are generalised concepts, to hopefully provide you with an overview of what’s happening around the farm.

The Mega Trend
Macroeconomics and “mega trends” are a consequence of sweeping global demand for one industry, product or service. Think of the rise of smartphones, the mining boom, China, the current dining boom and questions as to how we deal with ageing populations. Demographics are at the heart of macroeconomic trends. It’s no coincidence that the greatest 50 years of economic growth in human history followed the greatest population explosion on record – hiya Baby Boomers. Macro trends impact every one of us, from what’s available at the supermarket, to how it got there, and where it came from. The whole supply chain is implicated.

Farmers can capitalise on macroeconomic trends. For example, the demand for reliable, safe and high-quality food in Asia and Europe is significant. At home, we tend to forget that Mad Cow Disease, soil contamination and poor water quality are substantial issues in other regions of the world. These regions are willing to pay for our safe produce. Exportation of goods can provide a more reliable market for small to medium-sized farms and avoid some of the pricing risk of competing domestically.

The Rise of Niche and Artisan Food
We’ve all noticed that our food packaging and marketing is more frequently displaying terms such as ‘organic’ and ‘gluten free’. A quick walk ‘round your local supermarket reveals health food and gluten free sections that didn’t exist a decade ago. The niche market should possibly be the biggest target for small to mid-sized Gippsland farmers. Bloomberg, The Australian Financial Year and others have heralded 2017 as the Year Of The “Artisanal Butcher” and the Year Of Steaks. Restaurants all over the world are becoming ‘experiential’; places that you not only go to eat food, but hear the story of the food as you embark on a delectable journey. People are demanding better quality food, better information about their food and more sustainable practices regarding the production of their food, and this demand is worth billions of dollars.

Think of the terms Wagyu, Organic, Biodynamic, Zero Waste, Nduja, Kobe Beef, Randall Lineback Steak, Integrated Farming, Sourced Locally and Craft. These are all examples of massive niche markets. Gippsland’s Loch Brewery and Distillery are a niche spirits business, one that just so happens to have their first class gin now stocked in Attica restaurant in Melbourne and Noma, Copenhagen – two of the world’s best restaurants.

The niche and artisan trends are about bringing passion, narrative and humanity back to food. It’s a story of paddock-to-plate, rather than a story of mass production. This is a movement that even the smallest of farmers can become a part of. Tapping into this market is about developing a unique product, building the story around it and partnering with a local grocer, butcher and/or restaurant that can share that story with the public. Consider the feed, the breed and the practices of your farm.

The niche market has even given rise to the “blogging farm”. We have farms that pre-sell their meat to customers with the arrangement that the farmer uploads photos of the animal and details of the feed and care the animal receives. The customer gets the satisfaction of knowing the complete background on their food, and the farmer receives a premium, increased cash flow.

Sustainability and Renewable Energy
These terms, ‘sustainability’ and ‘renewable energy’ becoming catch cries of our current age, and fit closely with niche markets and could also become mega trends. Sustainability is not only good for branding and marketing your produce, but it’s good for the environment (especially our precious soils) and the continued profitability of a farm. We need to take care of the land if the land is to take care of us. Sustainable farming can increase crop output and productivity too, so it’s a win-win.

Sustainable farming practices have been thoroughly researched and the information is freely available at community presentations, sustainable farming groups, online or you can head to your local library. Gippsland truly has an incredible wealth of these groups and they’re very willing to assist your education in sustainable farming. Don’t forget to research alternatives such hydroponic farming, micro-biodiversity, and integrated farming practices.

Part of sustainability is utilising renewable energies and developing closed-loop or circular farming practices. Madowla Park, Echuca, is an illustration of these theories, as the canola farm now produces its own biodiesel and food grade canola oil from their crop. Not only has this development created sustainable practices, but it has created multiple revenue streams, while simultaneously reducing expenses thanks to a lower fuel bill. Not all farms can afford a biofuel plant, but there could be
opportunities for them to look at integrating other products into
their output, if provided the resources.

It’s all about creating multiple streams of revenue and reducing risk. As the climate becomes more volatile, it becomes increasingly important for farms to avoid being reliant on a single income stream. Look at the big picture of your farm: what goes in and what comes out, and see what can be transformed.
Think companion crops, strategic breeds, and diversification. For example, could free-range chooks improve the soil quality and reduce pests and insect damage to your vineyards?

Diversifying revenue streams also applies to incorporating renewable energy. According to the Climate Council’s report On The Frontline: Climate Change and Rural Communities, renewable energy sources such as wind farms can generate approximately $10,000 per year to the person whose land they are built on. Other options to reduce costs and potentially diversify revenue include selling electricity back to the grid from renewable sources, tree farming, capturing water run-off, utilising grey water and carbon farming.

At the end of the day, sustainability and renewable energy should assist in increasing your profit margins, increase the longevity of your business and add benefits to your branding and marketability.

Sustainability, renewable, niche and mega trends are all built on the growth of technology. The global market for AgTech is expected to be around $AUD260 billion by 2022, which includes everything from remote farm monitoring and drones, to farms on social media, and big data analysis and implementation. GPS and automation are going to be big for farming. Driverless autonomous tractors and fully automated farms are featuring heavily in recent press coverage. While large farms can reap the benefits of automation due to their scale, smaller farms will be more deliberate and nimble in how they incorporate technology.

In Australia’s far north, farmers are experimenting with mustering via drones instead of helicopters and horses. Drones are also being trialled for monitoring livestock health, weight, available food and access to water.

Vertical farms, where fruit and vegetable are grown hydroponically, in controlled environments, are beginning to appear all over the world. These hyper-efficient farms use recycled water, climate control and LED lights to grow row upon row of plants under cover. They vary in size from a humble shipping container to a warehouse. Without having to worry about climatic conditions they can produce fruit and veg all year.

Programs like SproutX are about developing AgTech in Australia; taking concepts from ideas to tangible products available for purchase. Government grants are often available for the agricultural industry and AgTech in particular.

When it comes to technology and the future of farming and farm management, awareness is key. If you decide that a range of new sensors that collect big datasets will improve your efficiency, then develop how to incorporate them into your farm over a five-year plan.

Farm Business Structure
It’s often forgotten that farming is business ownership, and like any business, company structure will affect the ability to adopt new practices, new technologies or new strategic directions. The traditional farming structure is a sole trader: the farm’s income is the farmer’s income and the farmer owns the land he works.

A consequence of the sole trader model is that most farmers have all their wealth tied up in farm assets. The bank usually has a big role to play in the accumulation of these assets and meeting repayment obligations can be challenging with the small margins on which many modern farms operate. Further investment to increase productivity and improve margins is seemingly impossible under this arrangement, but there are ways around this.

The first to consider is a sale and leaseback. This is where the major asset of the farm – the land – is sold under an arrangement that allows it to be leased by the farmer. With this strategy, the farmer receives an injection of capital, which can be used to invest in diversified revenue streams and to invest back into the productivity of the business. Remember that most businesses don’t own the buildings they operate in; there aren’t many cafés or shops that own the building they occupy, and a farm doesn’t have to be any different.

Not only could there be tax benefits to operating under a lease arrangement, but the investment into productivity can increase margins and/or output, which in turn improves profitability. These arrangements can be beneficial to the farmer in both the short- and long-term. A thirty-year lease arrangement could mean that more farmland remains productive instead of spawning housing estates, and both the investor and the farmer can reap those rewards.

The other strategy worth considering is cooperative sales agreements. This is where independent farmers come together to form a separate entity purely for the purpose of negotiating contracts. As individual little guys, it’s easy to be pressured and summarily screwed by the big competitors. As a collective, bargaining power increases and so should the bottom line. It’s all about who has the upper hand. In reality, the big supermarkets wouldn’t have anything to sell without farmers, and farmers need to work together to ensure they capitalise on this very important fact.

Defying the Capital Shortfall
Modifying a farm’s company structure, for example, might be better to defy the capital shortfall and get more private investment. Studies are indicating that if Australia wants to maintain its current market share of global food produce into the future, we need to invest a further $109 billion by 2022. If we look at this from just a production point of view, that’s an extra $9.7 billion that needs to go into beef, $12.6 billion for dairy and $10 billion for grains, with the balance being made up by other farming infrastructure and products.

This gap really does demonstrate the current market conditions for farms and farmers in Australia. Thankfully, there’s a lot that can be done to remedy it. Shifting business structures from partnerships or sole traders into companies with governance can make it significantly easier for private equity to become a part of a farm. Private equity and offtake agreements can assist with achieving economies of scale through funding land acquisition or technological investment.

Most of all, to gain investment is to be vocal and opportunistic. Know your business, know your numbers and be willing to take a risk as there are huge numbers of foreign and domestic investors that are looking for good returns on their capital and are willing to invest in farms, but they don’t know where to start. Getting capital all starts by knowing your farm inside and out and having a good plan in place.

Selling Up vs. Soldiering On
As we contemplate investment it’s easy to have the mind wander to everyone’s seemingly favourite investment – property, notably housing. Property investment and farming definitely have a mixed relationship. As the average age of Australia farmers nears 60 years old, and retirement comes knocking, a question has to be asked whether to sell to property developers or how to foster the next generation of farmers.

Let’s do a brief thought experiment and consider housing returns versus farms, considering capital gains and return on asset over the last 10 years. Since 2007, the median price for a house in Warragul has risen by 3.21% on an annualised basis. If we are comparing this investment to a farm, we have to assume that the house is producing an income, so it is rented out. The median annualised rental amount over that period is 4.43%. So, if you were to invest in a run-of-the-mill property in Warragul in 2007, you would now have total returns of 7.64% – not a bad investment.

Now let’s compare this to a dairy farm in Gippsland. The median price per hectare over the same period rose by 4.2%. The average dairy farm has had a return on assets during that period of 3.95%, which provides a total return of 8.15%. So maybe, just maybe, more of us should be investing in farming sustainability than in housing growth?

The times, they are a-changing and Gippsland’s landscape is changing with it. Change is presenting many opportunities too. Our farmers, and the practice of farming are not immune to these changes and trends, as I’ve hopefully described for you. All we have to do is stop, listen and think, and then hopefully we can
pursue opportunities and achieve outcomes, that are sustainable for both our rural and urban populations.

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