A Representative Irrigated Farming System in the Lower Namoi Valley of NSW: An Economic Analysis

Powell, J. and Scott, F. (2011), A Representative Irrigated Farming System in the Lower Namoi Valley of NSW: An Economic Analysis. Economic Research Report No. 46, Industry & Investment NSW, Narrabri, January.

Executive Summary

This report presents a description of a whole-farm budget for a representative farm in the Lower Namoi Valley. This is used to give a ‘snapshot’ of the financial performance of the model farm and to analyse the financial implications of changes in cropping rotations or changes in management practice.

The representative farm model is based on available data, local consensus and assumptions about the size of a typical farm and other resources such as labour, overhead costs, assets and liabilities and the nature of the cropping rotation used. The whole farm budget was constructed from these assumptions and from information on enterprise gross margin budgets.

The whole farm budget provides an indication of the financial performance at a particular point in time of a farm with a particular set of resources. Within this analysis water resources were severely restricted to reflect license allocations at the time. While the representative farm model presented in this Report may give a broad indication of the financial performance of many farms in the Lower Namoi Valley, it may be quite different for farms with markedly different resources or enterprise rotations to those of the representative farm.

Apart from providing a broad brush picture of financial performance, the model was used to analyse comparisons of alternative crop rotations in a whole-farm context. While simple gross margin analyses are useful at the enterprise scale, invariably a more thorough analysis at the whole farm scale is required to assess financial impacts of different cropping rotations over a longer period.

Results from the representative farm budgets for the Lower Namoi Valley indicate that even with restricted water entitlements the business would return an operating surplus of $152,070. This is equivalent to a return on equity of 3.1 per cent. The representative farm is vulnerable to commodity price variability. Results suggest that one year in five, the farm is unlikely to return a positive cash surplus.

Using the model to compare four rotational trials highlighted the importance of crop selection for the financial performance of the business. Mean results indicated a positive return for all rotations within the representative farm budgets for the Lower Namoi Valley. Farm operating surplus ranged from $177,715 to $374,755 indicating that given restricted irrigation water and average commodity prices each rotation would ensure that the business returned a profit. The rotations varied in resilience to commodity variability, however all treatments were likely to return a profit with the worst performing treatment at a 96% probability to return a positive farm operating surplus.

An important objective of our work was to develop some tools which can help in assessing the change in farm profit from new ideas and technologies generated by the research and advisory activities of Industry and Investment NSW. The models can also be used to give an assessment of the impact on farm profit of policy changes with respect to the management of natural resources.

Our work has been aimed at developing whole-farm representations or models that can be utilised, by researchers and extension officers, to assess potential changes. Such models can be used in at least two ways – to rank technologies and management practices while they are being developed or prior to release, and as a tool to strengthen extension programs by demonstrating to farmers that there may be sufficient financial advantage in a technology to warrant adoption. Of course we acknowledge that there are other aspects of new technologies (apart from the financial) that influence adoption decisions. We hope that economic analyses at the enterprise and farm levels will provide information which assists sound decision making.