By Chris Thomson | posted on July 18, 2018
BUYING the farm next door may not be the most profitable way to expand an agri-business in the Great Southern, especially in an era of climate change, a prominent Western Australian economist advises.
University of Western Australia agriculture economist Ross Kingwell, pictured, says many farms these days expand by first leasing new land nearby under a condition that they get “first dibs” on buying the property when the owner gets around to selling it.
“The advantage of that is you get to learn first-hand exactly what the quality of the land asset is that you’re likely to be buying so that you get very good intelligence about how valuable, how useful the land is,” Professor Kingwell says.
“The downside of buying out a neighbour is that you expose yourself to exactly the same climate variability that you face on your home farm.
“So that if on your home farm you get a dry year, you’re going to also probably get that on the neighbouring farm.”
Professor Kingwell says soils and enterprises that work best on neighbouring farms are also likely to do so on the home farm.
“So, you’re not spreading your risk; you’re just facing exactly the same risks on the neighbouring farm as you face on the home farm,” he says.
“The only advantage you really get is spreading your overhead costs across more hectares.”
Professor Kingwell says few farmers team up with farmers outside their area, but more should.
With colleagues, Professor Kingwell recently published a paper titled: Traditional farm expansion versus joint venture remote partnerships that modelled farm performance across 27 locations in south-western Australia, including the Great Southern locales of Katanning and Ongerup.
“The other way to go is the approach that the paper looked at, which is: ‘Well, what happens if you go into a joint venture with a farmer somewhere else who also wants to expand and can you share expansion opportunities by becoming joint owners in respective bits of land?’” he says.
“It works well if you’ve got two competent farmers who both want to expand but want to spread their risk.
“Both the farmers have to ask themselves a few questions such as: ‘Does this partnership offer economies of size for both our operations?’, ‘Does the expansion offer us potential to get some price discounts on our inputs?’, and probably most impor- tantly, ‘Are the returns from both farms a bit weakly correlated?’
“This would likely be the case if you had a farmer in a sheep dominant area like Gnowangerup go into business with a crop dominant farmer somewhere else.”
Professor Kingwell says in some Great Southern areas including Gnowangerup, Borden and Kojonup, climate change is actually proving beneficial – with less water-logging and better rainfall distribution.
“In the Great Southern, places like Ongerup and Katanning, it’s still possible to find a partner that reduces your risk and adds value to you business,” he says.
“So, even in the Albany area, which most people would consider a pretty good one for farming, it’s still possible to find a distant joint venture partner that actually adds value to your own business compared to investment in a farm next door.”
Professor Kingwell says out-of-area JVs are still “very uncommon” because they are so novel and it is difficult to identify a good partner.
“Most farmers do what their dads did, which is you just buy out a neighbour,” he says.
“Whereas, in the midst of climate change that advice may be less sound.”
