When I asked my folks to recall their memory of the 1956 wool boom that occurred as they were leaving secondary school, they have little recollection of it being halcyon days. As children of the war era, perhaps they and their parents were still struggling with a hangover from the Great Depression. But, that a 180 kg bale of wool would reportedly have bought you a Holden Ute or paid for a year of boarding school education suggests that wool then was worth around $360/kg in todays money. That’s eye-watering!
And what of their costs to produce that kilo of wool. According to The Bulletin of 1956 reporting on the Royal Adelaide Show results, 30 Collinsville rams averaged 647 pounds each or $13,818 in 2022 money. Shearing that year cost 7 pounds 9 shillings and sixpence per 100 sheep or $301/100 sheep in 2022 money. (Vic Govt Gazette) These are very roughly comparative costs with today’s seedstock and labour. (1 pound in 1956 is approx. equal in value to $40.50 in 2022)
So, when we look into the margins that 1956 wool growers could return, they were nothing short of phenomenal. Play that forward 65 years to today’s wool, meat and grain markets and we can see that even in these boom times, margins are still much slimmer than they were back then. Technological advances have driven yields in grains and prices are right up there all driving a good gross product. But gross margin is a different story.
Wool’s gross margins are decidedly slimmer in 2022 but never write it off. A turnup for the books could be just around the corner if oil-based apparel is its competitor. And Kiwi shearers come back. Beef gross margins are good largely because of restocking demand on the back of an extraordinary season in much of NSW and Victoria. Lamb gross margins are similarly driven by export meat prices which seem to be headed into abalone territory!
The predictive headlines for farming in 2022 are enough to make the most conservative farmer optimistic. I mean, if you’re waiting for an indication from the meat market that price and demand could get even better than 2021, I wouldn’t doubt that it could. But that said, the beef and lamb market has never been higher in real numbers than in 2021 so the laws of gravity could well kick in at some point.
A very large component of farm profitability lies in the gross margin, turnover and overhead costs incurred by a business. When we boil down the equation it looks thus –
(Total units produced x Gross margin per unit) minus Overhead costs = Earnings Before Interest & Tax (EBIT)
If ever there was a year to keep a close eye on cost of production, it’s 2022. Our suppliers are looking to share in the profits made from the paddock. If ever there was a good time for them to put up prices a little or a lot, it’s now. Sometimes we can afford to spread our farm profit around and sometimes we need to use it to build reserves. Reserves or retained earnings see us through lean times and sure as death and taxes, lean times’ll come again.
My 2-bobs worth (for what it’s worth). Explore ways to achieve a good EBIT. Investigate all the possibilities for your business to remain highly functional in the face of rising input prices. Nitrogen retention in crops, phosphorous liberation in pastures, improved desirable plant populations on each hectare, catalytic input stimulation, better lamb survival, optimal calving dates, selling price at farm gate, highly functional livestock rumens, soil water retention. This, by no means conclusive, list of issues to address within our management can give us higher EBIT results and at the same time, better firewall our businesses to the impacts of uncontrolled expenditure. And plan to put some reserves away.
Some of those 1956 wool cheques are still framed on some farm office walls around the country. Perhaps we should similarly frame the Account Sales from our agent to remind us in another 65 years of what these times were like AND pin a note to the back describing how it helped our life on-farm in 2022. That too would be eye-watering.
RCS Senior Advisor