Disciplines worth observing for success

The first stage will be battling a milk price which for two years will be lower than the cost of production.  The results will drag on another year as overdrafts and Fonterra loans need to be cleared.

Attached are 13 ‘disciplines for low-income farming cycles’, all of which need heeding in combination.    

1. Understand your current and medium financial position well. 

We expect farmers to be good at managing pasture, animals and people, to be able to fix most things onfarm and to be financial managers. Few people are outstanding in more than two of these five categories. If financial management capability is not in your top two suits you will likely need outside assistance to assess your financial position. Just as you cannot solve feed budget shortfalls without an accurate picture of grass cover, supplements on hand and grass growth projections, so you cannot solve cashflow issues without knowing your true position.

2. Financial decisions you need to make. 

Once you have a clear understanding of your current and pending financial position, identify the areas you need to address:

a. increased income

b. lower unit cost of production

c. cost deferment

d. deferred payment terms

e. optimised debt servicing package

f. additional term debt

g. injection of capital.

3. Identify whether you need someone to help address and solve those issues needing resolution in point 2 above. 

It is likely that the specialist required to take the x-ray in point 1 above is different from the specialist needed to fix the issues arising in point 2 above.

4. Profitably increasing your income. 

Increasing farm income usually comes about by ‘spending’ your way to higher income and/or ‘managing’ your way to higher income. Most likely only the latter will add any value during low income cycles. Managing your way to higher income requires making better use of available resources. 

Can you grow more grass by better management? Can you utilise more grass by better management? Can you milk more cows through the spring as a result of lower wintered cow wastage? These are income increasers that require no spending. They require knowledge to be applied, extra sweat with electric fence feed allocation, more farm walks, less pasture damage, etc. ‘Spending’ your way to higher income means buying fertiliser or feed -- spending capital and expecting to show a financial return. This method may work during high income cycles but is unlikely to work when product price is low. Even during high income cycles this method will be questionable for the lower 50% capability farmers (we never see 50% of farmers admitting they are below average – it is always someone else).

5. Lowering your cost of production. 

Production costs rise when farmers get sloppy during times of high milk prices. They also increase because marketers are trained to sell you products you may or may not require, or higher spec products than required, and at the highest possible price. Many modern products are priced for the maker/supplier to capture all the benefits. For example, parasite pour-ons are much more expensive than oral drenches. The maker/supplier pockets the farmer’s convenience of an easier job. Look at a rural retailer’s shelves and you may deduce that the use of oral drenches is now the exception rather than the rule. 100% nitrogen application on 90% of pastures, away from drains and races, will give better results than 90% nitrogen on 100% of the area. The first 15% saving of production cost can usually come about by buying 5% less product, choosing a brown-paper-bag/vanilla 5% lower-spec product, and by negotiating a 5% lower price.

6. Defer costs when these can be delayed one or two years without undue impact. 

Examples: painting the house, maintaining low volume farm races, controlling non-threatening weeds and deferring some fertiliser. The deferment in all cases will have some negative financial impact but will likely be less than penalty overdraft rates and certainly are not worth losing the farm over. Of course some essential farm spending will be required to ensure the farm’s value is maintained and that compliance rules are adhered to.

7. Optimising debt servicing packages. 

For many, or perhaps most, farmers interest cost will be the largest single expense. Here is where the sort of advice referred to in point 3 above can add value.

a. Is there a way you can reduce your bank overdraft, or term debt, by selling non necessary assets (animal, vegetable or mineral)?

b. Can you show your bank that you have good financial understanding of your business, that even though your cashflow is tight it is quite manageable, and that debt principal repayments can be suspended for a period?

c. Can you show your bank that despite your cashflow being very tight, you have a clear and planned pathway, and that some of your overdraft can be converted to lower interest term borrowing?

d. Can you show your bank that you have a planned pathway that is manageable and that it could share some of the load by reducing the interest margin to a good customer? If you provide good information and then ask for a margin reduction you have a greater likelihood of success than by just waiting for the bank to offer.

8. Introducing fresh capital to your business.

This could come from the sale of some assets, capital injection from a family member or outside capital. If it is outside capital, and it can be injected at full value (without any discount applied), then the question is as simple as “will the business be better for a stronger balance sheet versus any ownership control lost?” If the business is in more desperate need of a capital injection, the chance is greater that a value discount will be required to attract fresh capital. In this case the debate is about whether the business can survive adequately without the discounted fresh capital or whether the discount is a reasonable price to pay for stabilising the business and peace of mind. For those who worry about a tight financial position, discounted fresh capital injection may be a wise option.

9. Surround yourself with positive people. 

This is a key component when facing financial hardship. Attach yourself to people who are positive, but also realistic. People who have experienced tough times or are experiencing similar financial challenges to you will be good places to start. If you don’t like the feedback or advice you are getting from someone, don’t ‘shoot the messenger’, ie don’t block your ears to a message that is tough but realistic.

10. Do not delay when decisions or actions are promptly required. 

If you need to act on your cost of production, introducing financial advice, managing cashflow or recapitalising your business, every week of delay is likely to carry the dual cost of lost opportunity and a greater degree of difficulty. There may be options your advisors can provide on tax related options, benefit entitlements, income equalisation, etc, that have only limited ‘windows’ of application or entitlement. 

The quality of advice you get will often be most beneficial within a certain timeframe that may be limited, so timeliness is important. It is far easier to climb out of a hole 1m deep than a hole 2m deep. If you keep digging, the result may be a 3m hole –very difficult to climb out of without cost or other negative implications.

11. Limit your financial constraints to as few people as possible. 

Delaying payment of monthly accounts should be an absolute last choice because:

a. Farm servicing businesses need to be able to operate successfully in their own right, and your business will need them in the future. When financial adversity hits the farming sector farmers tend to complain a lot and rural service industries take the pain as farmers stop spending.

b. When the period of financial constraint has passed, do not expect quality service and sharp pricing if you used those businesses as banks through the tough times. The cost of servicing a higher bank overdraft is more honourable than stressing your service providers.

c. There is nothing wrong with pre-purchase discussions with suppliers or service providers about delaying payments. The supplier then has the option to agree to your request, to agree to your request with some reasonable cost consequence or to decline to supply you.

12. Prepare yourself mentally and physically for the added pressure. 

Sleep well, eat well and be active. No matter what age or shape you may be, exercising three times per week is refreshing and will promote good clear thinking. Help friends or family you may be worried about; they should be the first to help you in return. Take time off or throw a ‘hard times’ party; a good laugh is a tonic and everyone will be enduring some kind of hardship. Going to the doctor for a ‘warrant of fitness’ is worthwhile at any time; even more so in tough times as the most likely outcome is reassurance that your health is fine. That in itself is a tonic.

13. Share the knowledge you gain with others. 

Periods of financial constraint occur every three-five years. These require discipline but are quite manageable. The more serious once-in-a generation type financial periods are defining and life changing. 2015-16 looks to be a once-in-a-generation event. Life-changing means they can make you or break you. 

Those with the fortitude, discipline and capability to prosper in times of adversity have a responsibility to help others in the future who experience the same sort of challenges. In farming very few of us invent things: most of what we learn, we learn from others and usually at no cost. 

Those who benefit from the wisdom of others as they go through a difficult time have a responsibility to help others in the future.

• Mark Townshend, a former Fonterra director, owns dairy farms in New Zealand and overseas.