Planning for tough times

Hill country farmers face the prospect of potential losses in the coming year. By Rebecca Greaves.

In Business10 Minutes

Sheep and beef farmers staring down the barrel of a tough couple of seasons can put themselves ahead of the game by planning early, and deciding where costs can be cut.

‘Managing Difficult Times’ was the topic at a Beef + Lamb New Zealand Farming for Profit day at Alfredton, Wairarapa, in early October. Farmers heard from consultants from BakerAg and a farmer panel, which included former Wairarapa Farmer of the Year winners Bruce McKenzie and Royden Cooper.

A budget scenario for a typical North Island hill country farm presented by BakerAg’s Ed Harrison was sobering, with a potential $176,000 loss, based on forecast prices (and if true maintenance expenditure was maintained).

After the last three to four years, many farmers had put themselves in a strong position by either front-loading investment, paying down debt or having cash reserves to call on. This “war chest” would be needed to help ride out the next 12 to 24 months, he said.

Harrison admitted it was a tough message for those that didn’t have the war chest available, but said the three key actions for them to consider were to take on more debt, cut costs, or sell something (or a combination of the three).

“There are some stressed businesses with interest rates and commodity prices. It’s a tough message to put out there, but it is what we are seeing, losses.”

A theme that emerged was to know your risks, and work to mitigate them.

Attendees were taken through an analysis of the budget, and possible cost cutting in areas where cost was not fixed.

WAGES

Be smart with wages, while recognising a good employee and ensuring they are well or fairly rewarded for the job. A good employee adds value to your business and trying to cut costs here could actually have a negative impact financially. Look into apprentice schemes and wage subsidies that are available, like Apprentice Boost through WINZ to help with junior staff members. Apprentice Boost is a payment made to employers to help them keep and take on new apprentices. You could also consider taking on a cadet through an organisation, like Growing Future Farmers.

ANIMAL HEALTH

Healthy stock make you money. Have an animal health plan. Cooper said he viewed animal health as a fixed cost, and would not pull any of it in a tight year. He suggested buying product well in advance in case of shortages and to ensure the drench resistance status was known to avoid wasting money on product that is not effective. McKenzie shared a mantra of, if you want to make a profit, keep vets and helicopters off the farm. However, he said this was no longer appropriate in the current farming climate. Harrison said farmers were stockmen and looking after animals was first and foremost, so scrimping on animal health was not the answer.

REPAIRS AND MAINTENANCE

On the back of Cyclone Gabrielle and two wet winters there is a backlog of work – work you wouldn’t class as maintenance. For the farm to remain functional this work needs to happen. Grants and finance are available to help fund this remedial work. Doing your own servicing of machinery can save money, but could come back to bite you in the event of a health and safety incident.

SHEARING

A huge cost with little or no return for most strong wool farmers. Consider the benefits and costs of six-month or eight-month shearing – eight-month is cheaper but there are management advantages with six-month shearing. Is moving to a breed that sheds or grows less wool something to explore? Cooper said he was moving to Wairere Nudes in a bid to cut crutching and shearing. Wairere’s Simon Buckley said at face value it appeared a no-brainer to move to Nudes, but there was a lot of work to be done before it became mainstream.

INSURANCE AND RATES

Insurance premiums have increased 20-30% and rates by up to 20%. Reassess your insurance cover annually. Harrison suggested understanding exactly what on your farm is not insured and understand what is fixed or variable.

TAX

Talk to your accountant. Looking forward to 2024, make sure you review and estimate to reduce your provisional tax bill. Forestry or farming income from 2023 can be put into income equalisation to try to smooth income, it might be worth discussing if this option would be good for you. You have four years to take the money out but the catch is that it must be left in for at least 12 months (though there are situations when you can apply to take it out early, such as hardship or adverse events). Look at whether your stock is in the Herd Scheme or National Cost Scheme. Is now the time to change schemes?

FIX VERSUS FLOAT?

Fix to create certainty or try to beat the market? Certainty gives reassurance. Currently longer-term money is slightly cheaper, with an Official Cash Rate announcement due in November. BakerAg’s Chris Garland said in the event of another rise he didn’t see a lot of upside risk, but for those wanting certainty, it could be bought. McKenzie said it had always been his policy to float. “We won for years on the drops, now that it’s gone up, we’ve been caught, but we have had the wins.”

FERTILISER

It’s one of the biggest numbers in the expense column, but it’s the figure that could have the biggest impact on your bottom line. Can you miss a year (or two) of fertiliser and get away with it? Harrison said there were farmers who had been unable to get fertiliser on last year due to wet conditions, and this could be a second year without. They had applied lime and soil tests had not budged. Trials have shown that, off a good base, one to two years without fertiliser does not necessarily impact production hugely, but from year three onwards, the impact is substantial.

Key advice is to ensure soil tests are done and, if money is tight, to prioritise areas of your farm, such as crops or new grass. Your flat or rolling country could be growing three times as much grass as steeper areas. Soil tests will help you understand what you’re up against, and to make a plan.

  • It all depends on what your background levels are – a soil test is a cheap investment
  • Do what you can, where you can, to get the best bang for buck – prioritise the engine room of the system.

 

In summary, Harrison stressed the importance of having a good plan for the next 24 months. “Unless we see some interest rate relief or a lift in commodity prices, this result is probably going to linger for another year.

“Maybe it’s time to have a conversation with the bank. Is it the right time to sell carbon, or sell the boat? Get some clarity around your budget and make some decisions,” he said.

“If you’re doing 132% lambing and selling for $64, you will have to have some serious conversations. This is coming. Having a good plan in front of you now, I encourage. It adds true value to a business.”