A New Deal

Commodity prices are high and equipment is in hot demand – but 2021–22 will hold a series of new challenges for farms and agribusinesses, Andrew Hobbs writes

Top: The government’s Instant Asset Write-off Scheme was a significant factor in the machinery sales boom seen this year Inset: Commonwealth Bank’s executive general manager of regional and agribusiness, Grant Cairns

Grain producers will need to think carefully about their strategies in everything from grain storage to planting to equipment purchasing.

It goes without saying that inconvenient timing was a hallmark of the 2020–21 financial year, and the print deadline of Farms & Farm Machinery is sadly no exception. Between the time this article is sent to the printers and when it reaches our audience, treasurer Josh Frydenberg will have released the Commonwealth Budget for 2021-22 – widely expected to be his last before the Morrison government faces an election predicted to take place next year. There’s something of an irony in the fact that it was an announcement in last year’s budget that had such a big impact on this financial year’s accounting. That was, of course, the announcement of the Instant Asset Write-Off Scheme – a generous tax write-off that enables businesses with a turnover of less than $500 million to count the costs of buying and repairing depreciable assets as a tax expense up until June 30, 2021 – as long as they were purchased before December 31, 2020. The write-off was originally only for assets valued at under $30,000; but this was extended to $150,000 in March 2020, just as the first impacts of COVID-19 were being felt nation-wide. The government also allowed a deduction for the business portion of the costs of some depreciating assets from early October 2020 through to June 30, 2022 – with no upper limit in place. As the Tractor and Machinery Association reflects on page 32, this change in policy, combined with a strong production year in 2020 for many Australian farmers, has led to a boom in equipment and machinery sales. But, as the effects of COVID-19 continue, this boom in demand has been exacerbated by constraints of supply of new stock and spare parts, as supply chains struggle with new quarantining requirements brought on during the pandemic. And the effects of this are now being felt by the banks, with new data from the Commonwealth Bank showing that asset financing for equipment and machinery in agriculture is currently sitting at a seven year high. Commonwealth Bank’s executive general manager of regional and agribusiness, Grant Cairns, says the funding increase is being driven by farmers investing in transport equipment, sowing and cropping equipment, tractors and harvesters. “As farmers prepare for what is expected to be a significant winter crop production, upgrading old machinery has become a priority, with customers seeking to maximise productivity and take advantage of current government investment incentives,” he says. According to the Bank’s data, March 2021 was the third largest month for purchases of agriculture machinery since 2014. Tractor purchases are up 78 per cent and harvesters up 88 per cent, compared to the same time last year. Farmers in Western Australia have led the demand with new machinery purchases up 83 per cent, followed by Queensland up 47 per cent, and NSW up 30 per cent compared to the same time last year. Cairns says that purchases of cattle stock crates are also significantly higher than last year, following recent rainfall in pastoral regions. “While it has taken some time, Australia’s herd rebuild is firmly underway, and that’s helping prices due to high demand and ongoing competition between farmers and processors,” he says.

WHAT COMES NEXT

Early indications for the first half of 2021–22 look promising for the agricultural sector, with the Bureau of Meteorology predicting a 60 per cent chance of above average rainfall for much of southern Australia. On top of this, ANZ forecasts that a record Australian wheat crop, combined with good soil moisture, has put crop producers in a strong position – with demand likely to be high going into the future. Mark Bennett, ANZ’s head of agribusiness and specialised commercial, says that the new challenge for Australia’s agricultural sector will be evaluating its medium- to long-term business strategies. “When you invest for a generation and beyond, it’s critical to have a view of where you are in a cycle at any point in time,” he wrote in ANZ’s Commodity Insights – April 2021. “If, for example, you believe the industry is near the peak of a cycle, not just in terms of prices and production, but in terms of favourable interest rates, it might indicate whether growth or consolidation is the imperative.” With agricultural commodities at a significant high right now as the world recovers from the COVID-19 pandemic, it is only likely they will start returning to more “normal” levels in the future. “In particular, assuming a return to average seasonal conditions, the decline in wheat yields and acreage from the coming year is forecast to see Australian wheat production levels fall by around one-third over the next five years,” he writes. “Based on this outlook, and with their experience of volatile seasons, grain producers will need to think carefully about their strategies in everything from grain storage to planting to equipment purchasing. “And all farmers will continue to balance their own strategies of building wealth through capital gains and profits driven by operating margins; an issue especially top of mind given the recent and current strength of the rural property market. “Times are definitely good and will continue to be good for many. The best agri businesses will be those that take opportunities appropriate for them and their business model while carrying a healthy degree of caution, realism – and an escape plan – for when something goes wrong.”