A longitudinal examination of business performance indicators for drought-affected farms

Abstract

Frequent severe droughts can financially cripple dryland farm businesses and farmers need effective business strategies to survive. This study analysed the economic performance of 123 farms in a rainfed agricultural region of Australia from 2004 to 2009, a period that included severe droughts in 2006 and 2007. The business indicators examined were business equity, operating profit/ha, return on capital, and the debt to income ratio and the droughts altered these indicators for many of the farms surveyed. Over the study period the equity position of just over 60% of farms declined, although 55% of these had more than 80% equity in the business initially and were able to absorb a short term decline in equity caused by the drought. In addition, 9% of farms had levels of equity below 80% at the start of the investigation, but actually improved their equity position by the end of the study. Strong links were found between wheat yield and the business indicators. Mostly this was due to the crop dominant nature of the farm businesses where wheat was by far the main crop. However, farms that were able to capitalise on favourable conditions in other years were better placed to enhance or recover their financial position. Farms that cropped a higher proportion of their farm area were at an advantage. Structural indicators, including the percentage of area cropped, had a small but significant effect on the debt to income ratio, the return on capital and operating profit. Farm diversity also favourably lessened the debt to income ratio. Other factors, including farm size did not influence the outcome of any business indicator. Farms that remained resilient, despite the serious droughts were those that cropped more than 50% of their farm area, were prudent in their expenditure, maintained some enterprise diversity and often generated wheat yields in each year that were near the yield potential for that year.