Poor analysis leads to questionable results

The divide in knowledge and understanding between those involved in Australian agriculture and those involved in finance and business in the capital cities was made starkly evident recently, in an analysis published by research group IBISWorld of the levels of profitability of companies in different sectors of the Australian economy.

The research involved an analysis of the profitability of Australia’s largest 2000 companies over a five year period to 2013–14. The companies were allocated to economic sectors, and the average profitability (percent return on shareholders’ funds) was calculated for each economic sector. Agriculture fared the worst of all economic sectors in the economy, based on this analysis, as shown in the following graph.

Figure 1: IBISWorld’s analysis of profitability of Australia’s largest 2000 companies over a five year period to 2013–14.

Source: Ruthven, P (2015), Profitability across our industries, IBISWorld Media Centre, 8 July, available at: http://media.ibisworld.com.au/2015/07/08/profitability-across-our-industries/

The results appeared to paint the agriculture sector in a very poor light, so some further investigation was undertaken in order to gain a better understanding of how the numbers were calculated.

It turns out that the agriculture sector was represented by 16 companies, but closer investigation revealed that the definition of ‘agriculture’ used in the analysis was certainly not one that most people would use.

Of the 16 companies included, four were forestry companies, two of which were owned by state governments. Exactly how the return on shareholder funds for these were calculated is an interesting question, given government’s propensity to extract dividends and extra revenue from government-owned businesses in all sorts of different ways.

Another two companies were involved in aquaculture, and two were fishing companies, one of which also generates significant revenue from marine engineering and jewellery manufacture and marketing. A further three companies included in the analysis were agricultural commodity processors and traders.

Just two of the companies included were businesses that would be considered to be purely involved in agricultural production. These were both large-scale northern Australian beef producers, which have been affected by drought, government market intervention and the high Australian dollar in recent years. Three others were involved in agricultural production and also in food processing and marketing. This means that, at best, five of the 16 companies included could be considered to be involved in agriculture, as the definition is commonly understood.

What was even more curious about the analysis was that there are a number of other large companies that are involved in very similar activities to those ‘agricultural’ companies included in the research, but which were not included.
Interestingly, the analysis revealed that the average rate of return of all the companies involved in the analysis was a little over 6%. This is almost exactly the same average rate of return that has been generated by the 25% of broadacre farms that have an annual turnover of $400,000 or more per year, and which account for 70% of the total output of the Australian agriculture sector.

According to ABARES survey data, these farms have generated an average return of 5.9% per annum over the last 25 years since 1990, or 6.8% if the major losses and reduction in land values that occurred in 1991 due to the wool price crash are ignored.

Exactly why IBISWorld would publish such misleading data is difficult to understand, but needless to say it does nothing to improve the knowledge divide that exists between the Australian financial and agricultural sectors. Perhaps a few of the analysts need to get out into the bush and get a bit of dirt on their R M Williams boots!

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