Farms are peculiar assets. Returns are undeniable – but inaccessible. And subsidies, it seems, only make things worse.
Farms are capital-intensive businesses, with land, buildings, fixed equipment, working capital for labour, livestock, seeds, fertiliser – almost all of which needs to be expensed before a penny of income is received. For permanent crops, an income stream may be years into the future.
Much of that capital is locked up in assets for a very long time; and farmers never seem to generate quite enough income from their investment (or at least not enough to cover all their personal demands, let alone the re-investment needs of the asset). Farmers frequently understate their working capital needs (which also grow over time) – the world has plenty of providers of short-term debt to farmers. But farmers are also endlessly surprised at the relentless appearance of cash on retirement/sale, as machinery and crops are sold and the inputs for the next crops are not bought.
Farms are peculiar assets – part real estate, part commodity play (long only!), part operational with variable working capital needs, and with one unique characteristic which sets them apart: they are appreciating assets. To use a real estate analogy, farm productivity growth is as if you owned an office block with 100 floors, and a new floor appeared at very little or no cost every year.
And yet they are assets which are seen by many, and certainly by many farmers, as delivering (very) poor returns on capital.
Here is the conundrum. Over time (and this is more visible at an industry level than for individual farms), farms both produce more per hectare or per animal and do so with greater efficiency (reducing unit cost of production). These productivity gains fall to the bottom line and are then capitalised into the value of the farm.
This capital growth is a key component of returns, but, of course, is not cash in the hands of the farmer – and often not recognised as a return at all.