Farmers have a range of options to help them better manage funds for the bad years.
We know the bad years will come; drought in Australia is an inevitability. But there are ways to manage and mitigate against the risk of drought.
Farm management deposits (FMD) are a great tool for Australian farmers to help mitigate drought and other production risks. The purpose is to allow farmers to hold income from the good years for the bad years. What are FMDs and are they doing their job?
FMDs allow farmers to hold back their income into a special bank account. This stops them from paying tax (the tax is not paid on the money until they make a withdrawal). The intention is that the money is reserved for the bad years.
The Australian government stores a lot of data on FMD use, which is openly available. I thought it was worthwhile having a look at this data to see if they are working as intended.
Farmers funnel money into FMDs ahead of the new financial year, then reduce their balance in the next quarter. This creates an annual peak in the balance during June.
The peak each year in June is the important period. As the balance change graph suggests, the balance peak has been increasing each year until 2020 when the national average balance dropped.
Australia is a big country, and therefore there are differences between states. A look at the state-by-state data shows NSW has shown the most pronounced fall. This make sense, as NSW has been the focal point of recent droughts.
The FMD data is segregated into various industries, from pigs to sugar, and I have focused on grain. Interestingly, there are two very similar categories, crops and grain. I have combined these and compared them against grain production in each state.
The bar chart shows the change in FMD balance between June and June, the peaks between years.
This is overlaid against the production of all crops for the season that corresponds best.
We can see that there is a reasonably close pattern between the two. As production falls, then deposits into FMDs decline, and withdrawals increase. This pattern is shared across all states.
The biggest change in the pattern has been this year, where the production has increased dramatically. Still, the balance increase hasn’t corresponded as well. Why?
There are a couple of potential reasons.
• Lingering effects of drought. After the droughts of the mid-2000s, it took several years before farmers started positively increasing their FMD balances.
• Other tax options. The instant asset write-off may have encouraged farmers to spend as opposed to placing money in an FMD.
Based on the total held in FMDs against the number of accounts. The average value held in an account labelled cropping is $125,000, and $195,000 those labelled grain.
There is a cap of $800,000 on FMD balances. While the average balance is well below that level, we know that there are large and small farmers. There have been concerns that some farmers have filled their FMD bucket through discussions with farmers and farming representative bodies.
There are currently calls on the government to increase the cap on FMDs to take into account the large size of enterprises, especially so in Western Australia, where farms are large businesses.
All in all, we believe that FMDs are a valuable tool and are meeting the intended purpose. At the moment, the stars are aligning with productivity and price both strong; we should be using this time to prepare for the next drought.
FMDs are one of the tools to do this.
• Andrew Whitelaw is a manager of commodity market insights at Thomas Elder Markets (TEM)
