Just as respite from global supply chain issues is in sight, a perfect storm of other pain points is looming, writes Ross Paterson*.
Supply chain issues seem to be easing for Australia’s huge network of supply and distribution/reseller companies selling rural inputs to farmers.
Sea freight costs have reduced significantly in recent times (in one instance, the cost of shipping 40-foot containers dropping from $40,000 to $10,000, freeing up capacity for more goods to flow into the country).
However, this potential good news is tempered by the perfect storm of higher energy costs, rising interest rates and stubbornly high import costs for agriculture’s ‘big three’, chemicals, fertiliser and fuel.
These are the main challenges likely to impact the agribusiness sector in 2023.
Inflation is the biggest issue: rural merchandise businesses will bear higher wages on top of the existing skilled labour shortage.
Farmers already worrying about next season’s crops will likely have high input costs combined with lower commodity prices. This is a concern for their suppliers.
As is the flood devastation to prime agricultural land in Victoria, NSW and Tasmania – with any flow-on impact on food prices adding to already high inflationary pressures.
This perfect storm for farmers will likely flow on to agribusinesses due to softer demand for their products and services.
Most agribusinesses have a long supply chain and should therefore have good line of sight of their future cashflow. They should now be looking at long-term orders to see if a demand drop-off is on the horizon.
A look forward at your sales order book will determine your actions. Any potential drop-off can be factored into long-term acquisition, purchasing and staffing plans.
For example, an agribusiness selling machinery to farmers might usually employ many mechanics for maintenance and pre-delivery checks but if they see longer term reduction in orders, then they might let natural staff attrition take place.
With interest rates biting, more attention to cashflow constraint is required. I’d caution agribusinesses to have a plan in place ahead of 30 June 2023 when the popular instant asset write-off ends, and depreciation rules return to normal.
Instant asset write-off has been used as a “get out of jail free card” by many in the agri sector because they can buy machinery and instantly wipe away tax issues.
It’s important to note businesses have the option to not apply for instant asset write-off in this current financial year, to keep some depreciation available for future years.
We’re discussing this with clients now, recommending that it might be better to “spread the sugar hit” over a number of years.
Chemical and fertiliser retailers shouldn’t be too impacted by instant asset write-off changes although demand may marginally decline due to pricing.
For those selling plant items like silos or tractors there could be a heavy impact. I believe we’ll see a significant drop in demand post-30 June 2023 as many farmers have brought forward capital expenditure.
A higher interest rate cycle will also impact on cashflow. It’s going to be more expensive to buy machinery and with the increased tax burden farmers likely won’t spend as much on equipment.
Agribusiness input prices will remain high for reasons like the Russia-Ukraine conflict and because fertiliser production is heavily linked to energy prices.
Environmental and social governance (ESG) is another issue that should be on agribusinesses’ radar. RSM Australia is seeing strong agri client demand for ESG audits.
Some markets are demanding green credentials from agri suppliers, increasing pressure on resource-constrained SME operators to examine their environmental impacts and how to reduce them.
RSM Australia has created a free ESG handbook for SME owners who want to stay ahead of the sustainability trend. It can be downloaded from our website.
Beyond challenges, there are opportunities
I’d encourage agribusinesses to take advantage of SME technology tax incentives and training grants.
The Australian Government is incentivising you to train your people. Training helps with staff satisfaction and retention, so agribusinesses should be embracing this, especially in a tight labour market.
Investment in digital technology is also a no-brainer. It’s a good chance to embrace technology while incentives are there, to save or redeploy your existing labour costs.
*Ross Paterson is a partner and the national head of agribusiness at leading professional services firm RSM Australia. A Certified Practicing Accountant with a background in broadacre farming, he specialises in advising small to medium agribusinesses on a range of issues, including taxation, cash flow management, asset protection and business restructuring. ross.paterson@rsm.com.au
