Richard Davis case study

TRIO OF ENTERPRISES HELPS TO STABILISE RISK

FARMER: Richard Davis, Managing Director GR Davis Pty Ltd, Queanbeyan, NSW; Mt Mulga Pastoral Co, West Wyalong, NSW

DIVERSIFIED ENTERPRISES: Eucalyptus and tea tree oil production and processing; processing, packaging and distribution of essential oils; winter cereal cropping and Merino sheep

RICHARD'S KEY MESSAGES:

  • Diversification can help make better use of existing assets including land and equipment.
  • It can help spread financial risk as well as generating new income streams.
  • In addition to the financial investment, diversification requires time, mental and physical effort.

Richard DavisFor Richard Davis, the path to agricultural diversification has been a comparatively easy one. From his primary enterprise – the production of eucalyptus oil – he has spread his interests into conventional agriculture, adding cereal cropping and grazing to the mix. He sees the three elements as complementary but distinct enterprises within a business investment portfolio that is managed consistently to minimise the cost of production.

Richard is managing director of GR Davis Pty Ltd, Australia’s largest producer of eucalyptus oil. The company operates an essential oil processing and distribution facility in Queanbeyan, as well as the Mt Mulga Pastoral Company, based at West Wyalong, in central NSW, where it has extensive eucalyptus plantations. There is also a smaller plantation of tea tree at West Wyalong, which represents the company’s first foray into diversification.

Richard’s father Geoffrey established the eucalyptus oil business in 1964, and quickly moved to develop mechanical harvesting strategies that would allow the business to compete with producers in Portugal and Spain. However, it was the launch of China into the market in the early 1980s that really squeezed Australian production.

Tea tree trial

To offset the “flat spot” in the market resulting from the production of huge volumes of very cheap Chinese eucalyptus oil, the company decided to trial its own tea tree plantations along side the eucalypts. 

“We had already established a network of tea tree oil suppliers, and were processing their product, so we understood the market. We also had an investment in distilling infrastructure at West Wyalong, and plenty of land available. Although it’s not a prime environment for tea tree we thought we’d give it a go, and it has been a handy, if somewhat marginal venture,” Richard says. “It’s a relatively small plantation of tea tree, but we have developed niche overseas markets for it as an organically certified product.”

Richard David harvesting eucalyptThe 1980s also marked the company’s entry into conventional agriculture, as it added land for new eucalyptus plantations. The initial holding of 1000 hectares has been expanded to 6680 hectares, including some sheep grazing and cropping country, which Richard persuaded the family to hang onto and incorporate into the business.

When the company first began conventional farming, it contracted out the cereal cropping, but took on the livestock management. There were challenges managing flock numbers on the fragile soils in the semi-arid agricultural zone where they operate, particularly during extended drought, and for a while they divested themselves of sheep.

The cropping operations continued to grow and after several years working with share farmers the company committed to buying its own machinery, which has been the largest cost in diversifying its operations. The cropping enterprise averages around 2000 hectares of wheat, canola and barley and in a good year contributes more than 50 per cent of the company’s gross income. In a bad year cropping contributes almost nothing. This variability prompted them to reconsider their grazing operations. 

Restoring the flock

For the past 10 years they have been slowly rebuilding sheep numbers. The base of 1000 Merino ewes will be gradually increased to 3000 as part of a self replacing flock, with a focus on heavy cutting medium wool sheep. Wethers are generally sold as store lambs rather than directly to the prime lamb market. Richard says they did try crossbreeds for a time, but it proved too difficult to get the lambs to trade weight, given the land the sheep were running on.

Richard Davis sheep flock“We are rebuilding the sheep mainly for risk management. We do have a lot of different operations going on, and a self-replacing Merino flock is relatively easy to look after. The sheep consistently provide about 10 per cent of our gross income. Grain farming gives us much better income in good years, but much larger losses in poor years. The increase in sheep numbers to a commercial size flock will help maintain a level of cash flow in poor crop years.”

He says diversifying into conventional agriculture proved relatively easy because all of the background work has already been done; agronomists are available to provide help, the equipment is readily available, and markets are established. “You know what to produce in your area, and how to do it. As long as you have some capital behind you, it is pretty straight forward.”

Eucalyptus oil production remains the company’s primary enterprise, providing 40 to 80 per cent of the income, depending largely on the success of the year’s grain crop. But competing directly with China in the oil market leads the business to closely monitor the cost of production for all of its enterprises.
Cost management

“In Australia that means minimising labour,” Richard says. “Ten years ago we had eight staff running farm operations and six at the processing facility (at that stage located in Sydney). Now we have three times the turn-over and a total of six staff, along with some casuals and contractors.”

He says the changes have involved capital investment in computerisation and mechanisation of systems, and also rethinking their conventional farming practices – including the selection of Merinos over crossbreds for grazing, and a reduction in their cropping program.

“I think diversification is key for surviving in Australian agriculture as long as you have the financial, physical and mental ability to handle it. Our business has the capacity to handle three reasonably diverse enterprises on a commercial scale. Although we don’t make a fortune out of any of our products and we can lose money on nearly any of them, depending on the season. But our aim in diversifying is not so much about maximising profit, as the spreading of risk.”

FURTHER RESOURCES
More information on diversification in rural industries is available from the following RIRDC reports, which can be downloaded from www.rirdc.gov.au.