Don't spend without a plan

While it's no doubt a great relief to be in calmer waters, it's important not to be tempted by stronger cashflow into forgetting long-term strategy and spending without a plan. That risks finding yourself in greater hardship when the pendulum swings back again.

Wise farmers know it's best to make hay while the sun shines, keeping some in reserve for a rainy (or dry) day or season. Here are some of the key things to keep in mind, to ensure you have plenty left in the shed for the future.

Ring-fence your debt repayments

The truth is, instead of being well out in front financially, many are just getting back to zero. It's heartening to see many farmers focused on paying down debt incurred during the tough times. While it might make sense to upgrade infrastructure or vehicles right now - or even splash out on a renovation or holiday - also consider that banks (and the IRD) are cracking down on unpaid debt and taxes. When the going is hard, there's more leniency on big overdrafts, but that won't be the case now that the farm gate is swinging.

No one is saying a new ute, fencing or family trip isn't a good idea. You should certainly allow funds to complete deferred maintenance and repairs, and mental health is important too. However, banks will want to see you're ringfencing money for debt repayments as a priority, then putting a bit on discretionary spend, not the other way around.

Considering milk futures

It’s possible to lock in north of $10 per kilogram for milk price futures right now, but should you lock in futures for this season and the next, or go more short-term? While we’re coming up to two seasons in a row of near-record milk and beef prices, things can change quickly. US trade tariffs aren’t impacting New Zealand dairy exports so much, as it’s not a huge market, but they might have an impact on how much our major trading partners can spend in the future. Your licensed financial adviser and accountant can provide the best advice and assessment of what’s right for your business and help devise a strategy that fits in with your risk appetite.

Read More:

• Dairy sector flush with cash - but is it really in great shape?
• NZ dairy farmers repay $1.7 billion in debt as milk price hits $10/kgMS
• DairyNZ lifts breakeven milk price forecast to $8.68 for 2025/26 season

Is now the right time to invest?

Everyone’s circumstances are different. However, in general terms, consider the strength of your balance sheet as this is crucial to your business resilience. Growth should add resilience, not fragility.

For example, while red meat and milk are paying well right now, the cost of livestock is also very high and the investment in increased headcount and production won’t pay out straight away, but it will create greater holding costs. In a dairying environment, you might need more feed to increase production. Run the numbers on margin per unit, not just revenue.

On the other hand, with land prices flat or slightly down (except for regions like Canterbury), it could be a good time to buy grazing blocks if you’ve got some liquidity. Horticultural producers, notably crop growers, are also finding it easier to convert to dairying because of recent changes to consenting rules. As ever, consult a professional adviser to ensure you’ve studied all the angles before your make your decision.

Prepare for a bigger tax bill

A stronger year is fantastic for the balance sheet, but it often brings two cash drains at once: last year’s tax wash-up and this year’s provisional tax. After potentially years of losses or no net profits and no provisional tax to pay, this could easily be forgotten in financial planning.

Make sure that you’re factoring in what’s essentially two years’ worth of taxes to pay over the next 12 months to avoid a nasty shock at the end of the financial year.

Build your relationship with your bank

A strong relationship with your bank is just as important when times are good as it is when times are tough. Use the current favourable environment to optimise your pricing, debt structure and service levels. Having your bank aligned with your strategy is essential to success, so ensure they are involved and on board with your plans. If not, the banking market is very competitive and you may wish to test your approach with other providers.

Jed Eden is business advisory services - director, Baker Tilly Staples Rodway Taranaki