Being up with the business end of farming
Released 16 Aug 2011
James Houghton is the Federated Farmers Waikato provincial president.
The thinking of farmers up until the global financial crisis was more land, equals more stock, equals more money. This thinking needs to end, as discussed in a meeting I went to last week about farming and rural debt.
The days when you bought the neighbour's farm, just because you could, have to be put behind us. Instead, farmers need a better understanding of the real value of what they are buying and how much their debt will cost.
Three to four years ago, farm prices were sky-high and farmers bought up as much of their neighbours land as possible to increase production and grow their farm businesses. The global financial crisis ended that overnight in 2009. Since then banks have been forced to be much more cautious about who they lend money to, including farmers.
Some farmers see this as impeding their potential for growth, but with banks increasingly pricing their interest rates around the level of risk a farm presents, most famers are trying to pay down their debts.
Many who bought land without really looking at the business case for whether the costs of the purchase, upgrades and subsequent debt were outweighed by production gains have probably found their investment was not sound.
We need to use better judgement when looking at the real value of additional land. No matter what the markets are doing, real value is intrinsically tied to the income generated versus increased costs.
The banks' present risk aversion means there is a huge variation in the margins on interest rates, from 1.5 percent through to 10 to 13 percent in some instances.
The Federation has been and will continue to hold banks to account on whether their margins are fair and reasonable. Putting aside the issue over whether margins are ‘fair', farm businesses paying the highest interest rates are those carrying a very high level of debt compared to their income after expenses.
These farm businesses are the ones who should be trying to pay down debts the quickest, but those with the most extreme risk can often do little more than cover their interest obligations.
Many of these farmers are hanging out in hopes that farm prices will return to the ridiculous highs they were at three years ago to sell up on their investment. No one can afford to pay those prices and in some instances this has led to forced sales.
This is a time for farmers to take on a bit more knowledge in this area and take back the financial and business management of their farms rather than leaving it to the bank manager, farm consultant or accountant.
With the global debt debacle across Europe and the United States looking likely to tip much of the world back into economic instability, farmers need to know where the value lies in their businesses and how make the most of what they have got. We need to make a positive business based decisions going forward.
A couple of weeks ago I wrote about fertiliser cooperative Ballance Agri-Nutrients having recorded an $85.9 million operating profit over the last financial year. I note fellow fertiliser cooperative Ravensdown has also posted a $71.6 million profit.
The majority of their income comes from farmers who buy fertiliser. While I must commend them on their prices compared to their overseas counterparts, I still believe the profits are too high.
This, I think, re-enforces my previous points which were echoed by fellow farmer shareholders I have spoken over the last couple of weeks.
Paying a fair and reasonable price in the first place for fertiliser would lower some of the volatility for farmers who are essentially being overcharged upfront.
On Monday morning there was snow falling on my farm. This weather event will be quite significant for a few farmers, given the rarity of snow in central Waikato. Also, despite the good autumn, some farmers have concerns over feed, so hopefully we see a return to warmer weather soon.
