In my last few articles I have tried to present snapshots of the apple, pear and summerfruit industries, based on objective data.
My general conclusion is that, although some fruit growers will probably be doing okay, many are finding business quite difficult.
Before leaving the larger picture I would like to present some of the key issues for the future as I see them.
People: being passionate
Here’s a challenge. Get on the web and try to find out the average age of an Australian farmer.
I was fully under the impression that farmers were getting older, and indeed one site notes the average age as 60.
The National Farmers Federation’s Farm Facts 2012 states that the average age is 52. In a 2011 submission to the federal government, KPMG stated that the average age of an Australian framer was 56—one year earlier than the NFF statement. What answer do you come up with?
Leaving that to one side—given there is no firm answer—most farms pass on to the next generation. These days, that fact can be a blessing or a curse.
Farm numbers are declining (as are establishment numbers in many other industries); children have enormous choice in what they do with their lives, and there is a lot of money to be made outside the farm gate. So succeeding to the farm may not be so attractive any more.
In my career one truism I have witnessed time and again is that the best job is done by those who are passionate about what they do. They hit each day better, they absorb knowledge better, they apply it better, they rebound from knocks better.
One problem with farm succession is that it can occur because “that’s what we have always done, or have to do”, not necessarily because the successor really, really wants to farm—more than anything else.
And what makes ‘number-one’ son the right person to inherit the earth, just because he’s next in line? Has he done his years of apprenticeship on the farm? Is he any good? (And yes; not just sons, but daughters.)
Passionate—Thesaurus options: excited, eager, enthusiastic, heartfelt, ardent, zealous. This is the starting point for any business. If the owner is clearly passionate about farming there is a real chance he or she will be good at farming.
The other option? There are hundreds of careers out there with good pay, weekends off, holiday leave loading, long service leave, and superannuation guarantee.
Income: returns
It has become increasingly difficult to influence market returns for the staple pome and stone fruit varieties.
Although margins had been tightening for some time, the situation has become more problematic in recent years with market consolidation taking place.
Although new crops such as Pink Lady™ apples in its day, or cherries more recently, can have a honeymoon period of good prices; many growers are price-takers, not price-makers. This is unlikely to change in the near future.
Income: marketable yield
If land area remains the same, and returns are static, then marketable yield must increase if costs are to be met.
Increasing marketable yield is fundamental for sustainable farming businesses.
Example
The processing tomato industry is at the hard-edge of international competition and has been at that edge for years.
The price paid to growers moves a little but, in reality, has not moved in twenty years.
Tomato growers love doing what they do; so what have they done? In 1983 average yield was 29 tonnes per hectare. In 2011 it was 92 tonnes per hectare—and that result was badly rain-affected. Although new varieties have something to do with this, it was investment in new farming practices and technologies that did the heavy lifting.
Wheat farmers are chasing the eight tonne crop, rice farmers the five tonne crop. If prices are expected to remain steady and costs are expected to rise it is imperative that average marketable yield increases.
Costs
Unit cost
One near-certainty is that costs tend to rise each year. However, the key issue is that of unit costs. That is, the cost of producing, packing and marketing a box of fruit. It is one measure of how competitive a business or an industry is.
Unit costs fall when marketable yield increases and/or costs fall. Driving for higher yields and lower costs are ongoing objectives for business.
Cost control
Although much research work is put into output, there is less R&D directed towards cost control.
Labour forms about 60% of our cost base yet it always seems to be put in the too-hard basket.
In my view there is proven mechanical harvesting technology, for example, that could be applied in Australia, but we don’t seem to be trialling this.
But the United States and New Zealand are beginning to get into this and if they make a go of it, as European growers are doing, then watch out.
Profitability
The biggest source of business equity is profit.
The simple fact of business life is that you must make a sustainable profit during most years. Profit also has to translate into cash, because positive, sufficient cash flow is the life blood of business.
Farmers who grow cereals, or meat or dairy have little inhibition in talking about elements of profit. This is largely because their outputs go to known markets—everyone basically knows the price that everyone else can achieve, even if there are variations for say, quality.
Secrecy detrimental to industry
Horticulturists on the other hand have always been defensive, because marketing knowledge in particular, is worth protecting.
However, this attitude also means that there is little technical information about industry profitability. And it’s not really a big secret.
For example, if I know how many hectares you have under plantings, and a broad description of your fruit types, I can have a reasonable guess at your operating profit.
Where I see real issues about this secrecy is that, as a fruit industry, we are consolidating substantially faster than agriculture in general. That indicates that fruit businesses are closing at a faster rate than other types of farms.
No reference
Yet I have seen R&D proposals, one after the other, that contain the words, “the main outcome of this project is to increase industry profitability”. So, how will each R&D committee measure this outcome when they don’t know the industry’s profit position now?
Without knowledge about the starting point, it’s nothing more than a motherhood statement.
Sure, if you prune a certain new way that might increase yield then you should, all things being equal, have more profit.
Intangible issues never addressed
By the same token, you can have two neighbouring orchardists who each largely do the same things, but I’d be very surprised if they earned the same profit.
In my view, profitability has a lot of intangible issues around it—as much as many of the more tangible things we think will solve our problems.
Because profitability is not discussed realistically, these other things are never addressed.
R&D’s unreal payback
A final word on R&D. Some years ago the word came down from on high that R&D projects had to have certain ‘payback’ calculations performed to ensure that they delivered value for money.
All quite reasonable and laudable. And so, researchers and others would conduct discounted cash flow analysis to determine internal rate of return and other measures of value.
To do this, something like an 8% discount might typically be used, although I have seen 5% used regularly. The discount rate is important because it represents risk—growing risk, climate risk, market risk, and so on.
However, when expert witnesses conduct loss estimates in legal actions concerning orchards (you know, when there’s real money at stake) they will invariably use a discount rate, or risk rate, of 12–15%. Because that’s reality. And the higher the discount rate, the lower the estimated return.
So, in the R&D world, some outcomes have been judged on a basis that is substantially removed from the real risk world.
In my view that’s one example where the lack of knowledge about factors that contribute to industry profitability can lead to sub-optimal outcomes.
Exports
Right now, Australian primary producers can read article after article about the bright future that awaits them as an Asian foodbowl.
We’ve read this stuff before, but the story now seems to have legs.
The reality is that a consumer base of billions will offer significantly more opportunities than a consumer base of 23 million.
However, a key issue I perceive is that fruit could miss out on these export opportunities. The big gains will be made by meat and livestock, cereals, oilseeds and dairy as the diets of neighbouring countries change.
However, horticulture is rarely discussed in these articles and a recent ANZ-sponsored report on the outlook to 2050 contains a chart which indicates that the western diet contains not much more fruit than the diets of under-developed and developing nations—that doesn’t sound good.
Not good at exporting
Our reality is that we are just not that good at exporting.
The Pink Lady™ apple program showed what we can do when we try, but our export efforts tend to be opportunistic, and importers can play us off against each other in the relatively narrow windows we trade within.
Partially influenced by drought, many of our export volumes have collapsed.
Whilst we complain about the high dollar, I sincerely hope that is not the sole reason for our underwhelming performance, because it may not go away quickly.
The aforementioned meat, grain and dairy industries are major exporters despite the problems faced from time to time. If the exchange rate is the end of the line, then we are stuffed. We can do better; we need to do better.
Conclusion
I’m sure there are some businesses doing well, because in every industry there always are.
But the broad fruit industry is going through some tough times at the moment and there is not a great deal of optimism.
Yet I do meet growers who are having a go, including being intelligent about that. There is a quiet insistence that there is a good future to be had, and too much has been invested to stop.
At this time, it is passion that will drive resilience and success.
Read this article in the November 2012 Tree Fruit
