Rural Affairs
Issue No. 18 - August/September 2004
Grains of Truth
by Darren Arney
The grain industry is currently undergoing dramatic reform, with the proposed merger of ABB Grain and AusBulk and joint venture of AWB and Graincorp in freight logistic some key changes.
While these have attracted the headlines, another key issue affecting the grain industry is the change from a high commodity price environment to a more neutral one.
The last few months have seen a significant downturn in the value of existing pools as well as price expectations for the coming season. Managing this downturn will prove critical to the ability of farm businesses to achieve the results of the past years.
Changes in expected pool returns for 2003 /04 season grain will not only have an effect on profit, but will also impact on projected cashflow budgets and have tax implications for the farm business. Farmers’ confidence will also be affected by the low projected grain prices for this season.
With seeding completed, grain growers should now take the opportunity to review their business and grain marketing plans.
A review of the business plan would need to consider:
- Alternative sources of working capital due to delayed or reduced income from expected pool distributions. These sources could be redeemed farm management deposits, bank finance, crop advances, sale of assets or a larger percentage of cash sales at harvest rather than pool deliveries.
- Tax implications of lower than expected income to this financial year. Cash sales may be a better tool to maximise income to this financial year than pools.
- An assessment of growth opportunities, including the level of gearing and investment in the business
The review of the grain marketing plan would involve:
- An update of crop area and yield estimates
- An update of projected costs
- A recalculation of cost of production to establish breakeven prices
- The resetting of target prices
- A review of existing forward sales
