Managing risk in agribusiness, for a not so rainy day

Farmers throughout Australia, particularly in New South Wales and Queensland, are currently in the midst of the worst drought in over 100 years, with low rainfall in autumn and a dry start to winter devastating crops and leaving little grass in paddocks to feed sheep and cattle.

 

While Sydney has experienced some rainfall in recent months, seasonal conditions are worsening in up to 90 per cent of rural areas in New South Wales, with some farmers reportedly spending up to $10,000 a week to maintain their livestock.

According to the Department of Primary Industries, 10 per cent of NSW is already in drought, with a further 20 per cent – including parts of the southern tablelands –experiencing conditions described as “drought onset”.

I’ve been involved with clients with a farming interest for 25 years, primarily in cattle and also cropping, sorghum, wheat, barley and cotton. In that time, I’ve witnessed a number of extreme weather events that have impacted farmers, but this most recent drought has been the most severe I’ve seen.

Both sides of the fence impacted

I work not only with farmers, but also a number of second tier grain trading clients, and with independent fertiliser companies.

When it comes to extreme weather conditions, each client has a different experience depending on which part of the agriculture industry they operate in.

For grain traders, drought leads to a volatile market. It’s a time of great uncertainty with low yield and high prices, which needs to be managed in a strategic way.

Similarly, farming supply companies have to be prepared to meet the needs of their customers, no matter what comes their way – ensuring they have the right products available at the right time, to deal with unpredictable weather conditions, disease outbreaks and soil preparation, depending on the season.

With so much uncertainty around production, yield, income and expenditure among farmers as a result of the drought, I have put together my top six tips for farmers to prepare them for unpredictable seasons.

1. Keep debt low

My number one piece of advice to farmers when I work with them is to ensure they’re not over geared, with unsustainable debt levels. While it’s easier said than done, it really does reduce your exposure.

Farming is all about trying to keep debt down and reduce debt on land holdings to 30-40%. In farming you really do need to be more conservative than you would in other businesses to mitigate uncontrollable risks, like weather.

In hard times, it’s easy to fall into a debt trap so if your arrears are rising, it may be time to seek advice and put in place plans to reduce debt.

2. Supplement income off-farm

When a family is relying solely on the farm, one way to ensure finances stay in control is to have off-farm income to supplement the family income in difficult times. It’s a diversification strategy similar to what you would put in place with investments.

Whether that be the husband or wife taking on a completely non-farming (or not seasonal) related job, or passive off farm income from investments or other activities, every bit helps to support the family and the farm in times of drought.

3. Undertake a three-way forecast

I advise my clients to prepare for the future with a three-way-forecast, which means not only looking at their income and expenses each year, but also their cash flows and overall balance sheet for the coming years.

This is more about forecasting and projecting cashflow for the future and is something our advisors often help clients with.

4. Stay close to your bank

As a farmer, it’s essential to have a good relationship with your bank. When taking out loans, make sure you have flexible debt arrangements and provide the bank with all of the details they need to help you manage your debt in down-times.

Regular communication with your bank relationship manager is imperative. When you have a good working relationship with your bank they are more likely (and more able) to help you in times of need.

As agribusiness advisors, we often work with famers in conjunction with their banks to make sure lines of communication are open so that help is there when needed.

5. Work closely with your local agronomist

Farmers also need to work with local agronomists, so that changes in weather can be managed on the farm. This way, when weather events do arise the impact isn’t as intense.

For cattle that means looking at ratios and making sure you stick to sustainable farming practices. For grain, it’s about drought proofing your business, such as installing on-farm storage to keep surplus grain in good years to be sold at a higher price in volatile periods.

6. Access government grants

While it’s important to ensure you prepare for the more extreme times, some things – like the weather – are ultimately out of your control.

In times of drought or extreme weather, there are often government grants that are available to farmers to help them through the tough times.

Where available we encourage all of our clients to access government grants, such as the recent seven-year loans that have been offered.

These can be really helpful, not only as a way of getting farmers through a drought, but also to help with the cost of land improvements to ensure the next season starts well.

Accessing government grants is something our advisors can help with, so don’t hesitate to contact your local Bentleys business advisor for assistance.

Bentleys works with farmers and agribusinesses throughout Australia to help them manage the financial risk associated with unpredictable and damaging extreme weather conditions.

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