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Lessons farmers can use to bank more effectively

Lessons from the GFC farmers can use to bank more effectively


There are good lessons to be drawn on from the global financial crisis (GFC) for dairy farmers in managing volatility and getting the most from their banking relationship, says Hayden Dillon, Head of Corporate Agribusiness and Capital Advisory for Crowe Horwath.


Major rural banks were expected to support their dairy clients despite many farm budgets indicating negative cash flow positions for the coming year, he said. And post-GFC, banks had undergone significant reforms and were now well-positioned in terms of access to capital.


“It’s critical to note that major rural lenders do not assess the viability of farms based on last year’s or next year’s pay-out,” said Mr Dillon. “Banks are acutely aware of the market they operate in, which will sometimes see their customers run cash deficits due to volatility.”


Because of that, the banks used averaging, known generically as a “sustainable year,” to assess a farmer’s ability to service and repay debt.


With that in mind, farmers should pay attention to three key themes to get the most from their banking relationship, said Mr Dillon. These were:  


Understanding what their normalised costs are, and being able to justify those costs to their banker.

Having accurate information on hand and a process to make decisions quickly and effectively when faced with major events, such as drought, flood, change in milk price, or in the cost of inputs.

Understanding the potential ramifications of their banker making assumptions on the farmers’ behalf, as opposed to providing assistance and advice.


In good pay-out years farm costs invariably increased, but when things got tough, farmers were also good at tightening their belts, said Mr Dillon.

“Unfortunately for those with leverage it’s not good enough to just say you will cut costs when talking to your bank.”


While banks would draw considerable comfort from being shown that historical expenditure during good periods had led to ongoing increases in productivity, they also wanted to see that in the event of a low pay-out, those expenditures could be reduced without materially impacting production.

Crowe Horwath (NZ) Limited is a member of Crowe Horwath International, a Swiss verein. Each member firm of Crowe Horwath is a separate and independent legal entity.

The objective is to provide a set of normalised accounts to allow a “sustainable year” evaluation to be done. This needs to be completed by an independent adviser so the farmer had credibility with the ultimate decision-maker at the bank, said Mr Dillon.

Mr Dillon noted “The ultimate decision maker at the bank is most likely not your banker, especially when the business falls outside the terms upon which any funding was initially agreed”.


Dillon indicated that during the GFC there were consequences of farmers relying on their banker to do their budget. “In some cases this led to considerable stress, because the bank and the farmer had different expectations. And when things changed, the bank struggled to establish the communication necessary to enable both parties to manage their way through.”


In regards to budgeting, Dillon stressed the importance of constantly reviewing things as situations change, “Volatility of commodities, seasonal variations and input costs mean cash flow budgeting cannot be a ‘set and forget’ for the season.”

It’s also important to be prepared for any eventuality. “Having budgeting discussions and considering possible “scenarios” now will help ensure you are in a position to be aware of the information you will require and the people you will need around you”, said Dillon.


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