Background information
The most obvious risks for sheep enterprises are seasonal and price risk. Less obvious, but just as important, are human resource, demographic, environmental and economic risks. The degree to which any one of these is a threat to a business will vary according to location, production system, financial position, farm size, and so on. It is critical that each business does its own risk assessment and quantifies the relative importance of these risks.
Key decisions, critical actions and benchmarks
The risk that external factors pose to the business is a combination of:
- The probability of the event. The size of the loss, should it happen, and
- The longer-term implications for the business.
These things change with time and therefore must be constantly under review. For instance, after a few good years there may be a higher probability of a drought, but if fodder or cash reserves have been built up the implications for the business will be much less than for a drought that follows a few poor years.
A farm business risk assessment template (tool 1.10) is provided to help identify the major risks. It covers the 12 most common areas of risk and asks the questions you should answer when considering these risks.
Planning to manage risk
Because drought is common to all sheep producers, it is used in tool 1.10 as an example of how the principles should be applied. Many of the other risks assessed in tool 1.10 require a more subjective approach, but the same principles (likelihood and potential impact) apply.
Assess enterprise change and new technologies
Background information
Being able to quantify the benefits of change is integral to committing to that change. Changes likely to be implemented will range from simple modifications to an existing enterprise (for instance, a change in ram source) to complex changes affecting the whole enterprise (for instance, moving the focus from wool production to lamb production).
It is not uncommon for potential returns from on-farm investment to vary from 10% to more than 30%, so it is worth identifying the better investments.
Introduction
Assessing competing investment options for a farm’s scarce resources involves quantifying or qualifying:
- Net change in expenses — taking account of any increased costs (cash and non-cash costs such as additional owner labour requirements or depreciation on plant and equipment) and reduced costs.
- Net change in income — accounting for increased income and any trade-offs, such as lower wool income if there is an increased focus on lamb production.
- Scale of the investment — for example, an investment in pasture improvement will need to be accompanied by an often greater investment in additional livestock and may require increased management inputs.
- Likely repayment period — for the investment and the cash flow implications, taking account of the climatic and production risks involved.
- Life span of the expected benefits from the investment — for example, an investment of $50,000 in a change that produces a benefit of $15,000 p.a. over 10 years ($150,000 in total) is better than an investment of the same amount with the same benefit but only for 5 years ($75,000 in total).
- Nature of, and additional exposure to risk associated with any new or alternative enterprise.
Key decisions, critical actions and benchmarks
Farm businesses most often involve multiple enterprises with complex interactions between them. To ensure that returns are improved over the whole farm, the calculations are best done on a whole-farm basis.
Two planning tools are provided in this procedure.
Partial budgeting (tool 1.11) is most suited to significant investment decisions (buying more land, embarking on a new enterprise, re-fencing the farm, or embarking on a major revegetation program) where a more rigorous planning process is required. It is often demanded if significant borrowings are needed. Such significant decisions do not happen often on most properties. There may be only one or a few per decade.
Tool 1.11 shows a worked example of a partial budget and the subsequent return on investment calculation. This can be used as a template for analysing straightforward adjustments to the business.
If the partial budget in tool 1.11 is not appropriate to the situation, or to the level of information or skills at your disposal, the SGS one-page planner (tool 1.12) might be more suitable. It is a less formal tool that allows quantitative and qualitative information to be included. This tool is most suited to important decisions that affect the operation of the farm – you might make several of these a year.
The focus is on decisions that can have flow-on effects across the system, or decisions in areas where you lack confidence to do something ‘off the top of your head’. Examples of such decisions might include, for example, fertiliser applications, changing grazing strategies, selecting different rams, re-sowing a pasture, etc.
Tool 1.12 provides a planning template and a worked example (assessing a decision to renovate a pasture) and provides the opportunity to incorporate non-financial information (such as environmental impacts). In fact, the tool can be used to assess environmental projects that may have little financial analysis.
Seek professional assistance if you need tools for whole-farm analysis across multiple enterprises to quantify the complex interactions between:
- Marginal costs
- Marginal income
- Discounted cash flow analysis
- Time to break even
- Lifespan of the investment and Relative return on capital invested.
Resources
Towards Sustainable Grazing, the professional producer’s guide (2003) Edited by W. Mason, L. Warn and G. Cahill, Meat & Livestock Australia. To order a copy, phone 1800 675 717, or visit www.mla.com.au/publications.
The Farming Game – Agriculture Management and Marketing, 2nd Edition (2005) Bill Malcolm, Jake Makeham and Vic Wright, Cambridge University Press – to help determine comparative return on investments.
Tools available from www.makingmorefromsheep.com.au
