Why agribusinesses need a finance method that suits

March 3, 2016

While investment in real estate and our resources industry tends to dominate the national economic conversation, the agricultural sector has been a steady performer and contributing to Australia’s growth for some time.

Figures from the Australian Bureau of Statistics (ABS) show that in the 2013-2014 financial year, the total value of production in this sector increased by six per cent, reaching $51 billion in total. This trend of yearly rises in the total value of production has stayed relatively steady since 2007-2008, while value growth in wheat and milk production has helped sustain the bottom line for many agribusinesses.

The ABS notes that livestock disposals and products saw a gross value boost of 13 per cent, which was the main driver behind the growth. Meanwhile, the ongoing Free-Trade Agreement (FTA) with China has gone some way towards expanding the prospects for Australian agribusinesses to push into this key foreign market, particularly so for the food production side of the agribusiness industry.

However, the agricultural sector continues to be restricted by common constraints in the form of difficult conditions for crops, changing legislation and a reliance on capital-draining assets. All of the FTA advantages will be difficult to realise if production can’t keep up with demand – and this ripples directly down the production line to packagers, distributors and food-processing businesses.

In essence, agribusiness today is a world away from what it once was in the past, with managing high yield, productivity and balancing capital successfully top of the agenda for many in the industry. Strong performance amidst challenging conditions requires companies to evaluate ways they can be more productive, maximise capital efficiencies and continue to grow.

Relying on machinery

A recent Ken Research report titled ‘Australia Agricultural Equipment Industry Outlook to 2018’ shows the high machinery requirements of the agricultural sector. For example, the sugar cane industry is approximately 90 per cent mechanised, with machinery such as tractors, combine harvesters and balers conducting 99 per cent of crop harvesting.

Throughout the supply chain across various agricultural industries, machinery is allowing for higher yields for agribusinesses in the forms of better-kept produce, more efficient harvesting, better distribution and faster packaging. However, this puts an imbalanced weight of expectation on equipment – what happens if it becomes outdated, or stops working altogether?

Faced with high upgrade or replacement costs for expensive and integral-to-production assets, agribusinesses are looking to acquire machinery and tools in a new way – through equipment finance, rather than outright ownership.

Leasing vs buying outright

The January 2016 Alleasing Equipment Demand Index (the Index) indicates that as in the first quarter of 2016, only 16.7 per cent of agricultural, forestry or fishing businesses surveyed intend to buy equipment outright. Meanwhile, eight in 10 businesses in this sector (83.3%) are planning to secure equipment through an operating lease – a huge increase on the 28.6 per cent recorded in February 2015.

With the equipment used by agribusinesses so integral to productivity, the number of entities using equipment finance is understandably way above the 25.4 per cent industry-wide average, according to the Index. Expensive assets agribusinesses need can be acquired via a finance agreement without crippling cash flow, and maintained through an effective asset management plan.

This suggests more agribusinesses are taking advantage of the benefits of equipment finance options such as an operating lease for the good of their ongoing productivity and, ultimately, their bottom lines. An equipment finance solution is about maximising capital efficiencies through:

  • Freeing up capital expenditure (capex) to allow agribusinesses to expand and invest in their businesses in other ways, such as hiring new staff or purchasing new land;
  • Smoother payment plans over the long term rather than a singular upfront payment, improving financial flexibility;
  • Inclusive of soft costs, such as installation and commissioning – a number of equipment finance agreements can also comprise maintenance;
  • Tax concessions from moving asset purchases off balance sheet from capex and into operational expenditure (opex).

Ensuring equipment is up to date

Agribusinesses can also benefit from an ongoing asset management strategy, to keep equipment in prime condition without taking on unexpected costs should these tools fail, become unproductive or obsolete.

The Index shows that 92.8 per cent of surveyed respondents in the agriculture, forestry and fishing sector believe assets that are overdue for replacement impact their operations. This is significantly higher than the 64.6 per cent average recorded across Australian businesses, regardless of industry, and even the 18.6 per cent of agribusinesses that said assets overdue for replacement do not impact their operations.

Compounding the issue, 83.3 per cent of respondents in the agribusiness sector plan to acquire replacement assets in the near future – far above the 43.1 per cent average. Without a plan in place for funding these new or replacement assets, capital-poor businesses may become dangerously more so.

When it comes to equipment funding options, an operating lease puts the responsibility for asset management in the remit of the lessor. Where once capital-strained agribusinesses would have to find money to keep their equipment at peak productivity, they can now reconcile that cost as part of their equipment finance agreement. For example:

  • Should machinery need upgrading or maintaining, either can be done without further capital investment if built into the agreement;
  • Should equipment fail, it can be expediently replaced;
  • When the lease term ends, equipment can be returned or upgraded, or the lease extended, depending on the business’ needs.

From field to shelf – spanning growing and producing, processing and distributing – agricultural production is an extensive process, and requires flexible finance solutions.

 

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