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Farm income and profitability

Long-term trends in farm profitability are jointly determined by changes in farm productivity (i.e. output generated per unit of input) and farmers’ terms of trade (i.e. ratio of the price received by farmers for the outputs they produce to the prices paid for the inputs used in production). As is the case for farmers the world over, terms of trade for Australian farmers have been on a declining trend over the long term. By contrast, productivity in Australian agriculture has been on a long-term upward trend (see Trends in productivity growth in Australian agriculture).

Long-term trend in input and output costs and farmers’ terms of trade, 1991-92 to 2010-11

Long-term trend in input and output costs and farmers' terms of trade, 1991-92 to 2010-11

In the case of Australia the rate of productivity growth has exceeded the rate of decline in farmers’ terms of trade. As a result, the gross value of farm output has been on a long-term upward trend, increasing at a faster rate than farm costs. Thus, one of the key measures of farm financial performance, net value of farm production (i.e. the value of farm production less the variable cost of production), has also been on a long-term upward trend (notwithstanding short-term ups and downs along the way due to seasonal conditions and fluctuations in commodity prices).

Long-term trend in farm finances, 1991-92 to 2010-11

Long-term trend in farm finances, 1991-92 to 2010-11

* The gross value of production is the value placed on recorded production at the wholesale prices realised in the marketplace.

**  Farm costs are the sum of payments made by the farm business for permanent and casual hired labour (excluding operator or manager, partner and family labour), materials, services, produce purchased for resale, livestock purchases and transfers onto the property, interest and payments to sharefarmers. Capital and household expenditures are excluded from total cash costs.

 Net production value is the gross value of farm production less total farm costs.

Gross farm income for the Australian agricultural sector in 2011-12 was AU$53.1 billion. With total farm costs of AU$37.6 billion, net pre-tax farm profit was AU$15.5 billion. This equates to an average gross margin on Australian farms in 2011-12 of 57% and a net pre-tax profit margin of 29%.

Recent financial performance of the Australian agricultural sector, 2007-08 to 2011-12

Recent financial performance of the Australian agricultural sector, 2007-08 to 2011-12

* Gross farm income is the total of revenues received by the farm business during the survey year, including revenues from the sale of livestock, livestock products and crops, plus the value of livestock transfers off a property. It includes revenue received from agistment, royalties, rebates, refunds, plant hire, contracts, sharefarming, insurance claims and compensation, and government assistance payments.

** Total farm costs are the sum of payments made by the farm business for permanent and casual hired labour (including operator or manager, partner and family labour), materials, services, produce purchased for resale, livestock purchases and transfers onto the property, interest and payments to sharefarmers and depreciation.

 Farm net pre-tax profit is the gross farm income less total farm costs.

Recent profit margins in the Australian agricultural sector, 2007-08 to 2011-12

Recent profit margins in the Australian agricultural sector, 2007-08 to 2011-12

Australian farmers have achieved this financial performance despite having one of the lowest levels of government subsidy support for agriculture of any major agricultural producer. Australian total producer support in 2010 was 2.65% (as a percentage of sector revenues) compared to the OECD country average of 19.87% .

Comparison of agricultural producer support estimates for different regions, 2010

Comparison of agricultural producer support estimates for different regions, 2010

For a more detailed analysis on the variation in farm profits and investment returns between different Australian states, download our free report, Comparative Analysis of the Australian Wheatbelt. The document addresses the key question: which region of Australia has delivered superior returns to agricultural investors in the past and is most likely to offer superior risk adjusted returns in the future?

References and data sources:

  • Australian Bureau of Statistics, Australian National Accounts, National Income and Expenditure Data Series, 2012
  • Australian Bureau of Statistics, Value of Agricultural Commodities Produced Data Series (chain volume measure), 2012
  • Australian Government Department of Agriculture, Fisheries and Forestry, Australian Bureau of Agricultural and Resource Economics and Sciences, Agricultural Commodities Statistics, 2012
  • Organisation for Economic Co-operation and Development (OECD), Producer Support Estimate by Country, 2012
  • World Bank, Agriculture & Rural Development Database, 2012
  • O’Donnell, C 2010, ‘Measuring and decomposing agricultural productivity and profitability change’, Australian Journal of Agricultural and Resource Economics, vol. 54. pp. 527–560.
  • O’Donnell, C, Chambers, R and Quiggin, J 2010, ‘Efficiency analysis in the presence of uncertainty’, Journal of Productivity Analysis, vol. 33, pp. 1–17.
  • Zhao, S, Sheng, Y and Gray, E 2010, ‘Productivity in the Australian grains broadacre and dairy industries’, conference on the Causes and Consequences of Global Agricultural Productivity Growth, Washington DC, 11–12 May 2010.