Farming in Australia represents a unique intersection of two distinct businesses: property investment and agricultural production.

This combination has worked seamlessly for centuries  – good farm management delivered strong agricultural operating returns. It’s a relationship that farmers haven’t really had to think hard about.

And we have seen the abundant fruits of this relationship in the last 10 years – capital growth has strengthened farm balance sheets significantly, allowing further investment and productivity growth to flourish.

But often the addition of a third business – farm contracting – can upset the balance across the entire farm business.

Many years ago, a client explained that by starting a contracting business within his farming business, he could justify the purchase of a harvester and strip his crops “for free”. It wasn’t long before farm interest was getting harder to meet, let alone equipment payments, and efforts for other farm goals were falling short.

The common problem I constantly see is that farmers who start a contracting business fail to demand that business ‘washes its own face’. A question that’s commonly overlooked is: can my contracting activities stand alone as a business? Or will it need to be subsidised by the farm?

The example of getting a free harvest is a good example to start with. The opportunity cost of harvesting your own crops is that you miss out on income of doing someone else’s. That automatically means your contracting business will be less profitable – more machine hours for less income.

Or in seasons where demand for contracting shrinks, farming activities tend to have to subsidise the contracting business with its cash flows. That means less money to reinvest in the farm property itself which may hinder productivity in the future.

The key to avoid making contracting a drag on the farm is to assess it as a completely separate business including operating costs, finance costs, repairs and maintenance, replacement costs and, most importantly, wages – a good proxy for the value of a farmer’s time.

Contracting can be a successful adjunct to a farm business if the structure and decision to invest is done right. You should demand a minimum return for the investment and be prepared to walk away if it doesn’t ‘wash its own face’.

A version of this article was published in Central West & Hilltops Farmer liftout on Friday, 5 July 2024.