Video | Agriculture | Confidence | Economy | Energy | Employment | Finance | Media | Property | RBNZ | Science | SOEs | Tax | Technology | Telecoms | Tourism | Transport | Search

 

Lessons farmers can use to bank more effectively

Lessons from the GFC farmers can use to bank more effectively

25/06/2015

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.

ENDS

© Scoop Media

 
 
 
Business Headlines | Sci-Tech Headlines

 

Stats NZ: Consents For New Homes At All-Time High

A record 41,028 new homes have been consented in the year ended March 2021, Stats NZ said today. The previous record for the annual number of new homes consented was 40,025 in the year ended February 1974. “Within 10 years the number of new homes ... More>>

Stats NZ: Unemployment Declines As Underutilisation Rises

The seasonally adjusted unemployment rate decreased to 4.7 percent in the March 2021 quarter, continuing to fall from its recent peak of 5.2 percent in the September 2020 quarter but remaining high compared with recent years, Stats NZ said today. ... More>>

ALSO:

Digitl: The Story Behind Vodafone’s FibreX Court Ruling

Vodafone’s FibreX service was in the news this week. What is the story behind the Fair Trading Act court case? More>>

Reserve Bank: Concerned About New Zealand's Rising House Prices

New Zealand house prices have risen significantly in the past 12 months. This has raised concerns at the Reserve Bank of New Zealand – Te Putea Matua about the risk this poses to financial stability. Central banks responded swiftly to the global ... More>>

Westpac: Announces Strong Financial Result

Westpac New Zealand (Westpac NZ) [i] says a strong half-year financial result has been driven by better than expected economic conditions. Chief Executive David McLean said while the global COVID-19 pandemic was far from over, the financial effect on ... More>>

MYOB: SME Confidence In Economic Performance Still Cautious

New insights from the annual MYOB Business Monitor have shown the SME sector is still cautious about the potential for further economic recovery, with two-in-five (41%) expecting the New Zealand economy to decline this year. The latest research ... More>>