Struggling? Give us a call
ASB head of rural banking Aidan Gent is encouraging farmers to speak to their banks when they are struggling.
"One thing that rings in my ears from the global financial crisis is a lot of farmers said to me 'I feel as though I have lost control of my business and if I ever get out of this, I never want to get back to this space again'," Heer says.
"With volatility there could be times when farmers feel they have lost control of their business so they will just have to think about how their balance sheet can give them the control and confidence moving through those cycles."
Volatilty will continue to play out in our dairy industry for the foreseeable future, Heer said in a 'Riding the Milk Price Roller Coaster' presentation at the recent Dairy Womens Network conference.
Although we have always had volatility, if the degree of volatility increases we need to make a change to our business, he says.
"What you see in industries where there is a lot of volatility is a drive for much stronger balance sheets. When your profit and loss is strong it doesn't matter so much what your balance sheet looks like because the cash and the profit is driving your business.
"But when your profit and loss -- your cash -- is not so strong, it is a strong balance sheet that really gives you confidence and control of your business."
Under regulations, any business that borrows over $1 million has to have a risk rate attached to it and the banks have to work out that risk rate. All have different models but essentially they ask five questions: repayment capacity, trading history, equity, personal factors and industry factors.
Heer says you need to look at which of these you can control. For example, the components the banks would look at from a personal perspective are financial management and onfarm performance relative to your peer group. Those two things you would have a lot of control over – how you budget, monitor cashflow and manage the financial performance of your business.
You could ask your bankers whether your financial and physical performance was limiting your credit rating and whether you had the opportunity to improve those and therefore improve your credit rating.
"In financial performance, dairying has a risk grading and if you are in dairying you have that risk grading and you can't do anything about it," he says.
But through all the cycles, one constant in the market is an underlying growing demand for proteins – for food. The trend is 2-3% global growth annually.
The demand for milk is seen as reasonably stable and growing.
"Some of the figures on where food production forecasts go are quite inspiring," Heer says. "Some figures show up to 50% more food needing to be produced in the world by about 2050. We see that playing out as a slow steady demand for our milk."
With volatility the bank doesn't see demand as a factor in play. "We see that as a reasonably stable trend. Supply... to us is the factor really driving the volatility.
"Through periods of very strong price growth such as 2013-14 we saw a global response to those price signals and a big growth in supply. We expect as the current signals flow through to see a drop in supply."
