A combination of factors over the past six months has
put some farming businesses under extreme pressure, with the levels
of working capital required higher than the late 1990s and early
2000s, when farm profitability was at a low point. But now this
pressure comes in the context of a downturn in the wider economy,
which has direct implications for the farming
industry.
World economic factors, financial instability in the UK and
world banking sector and the weather have all had an impact on both
output and farm costs, and, therefore, on cash flow.
Improved cereal prices of harvest 2007, due to the world supply
and demand imbalance in grains, were a saviour for some, but a
burden for others. At some point most arable farmers benefited from
higher prices, which more than compensated for a below-average
yield. For the livestock sector, however, this was a burden, with
costs increasing for any feedstuffs based on cereals, maize or
soya. This created a difficult period for some livestock producers,
most notably those in the pig and poultry sectors.
The sea-change in world supply and demand dynamics of bumper
yields, increasing stocks and reduced market speculation as a
direct result of the financial crisis all led to prices falling
dramatically. Overnight all optimism in the UK arable sector
disappeared and many farmers exacerbated their cash-flow problems
by refusing to sell at today's prices.
The wet and late harvest led to later-than-usual grain sales and
a lack of cash to cover fuel, fertiliser, chemical and contracting
bills. For some the wet harvest led to serious crop write-offs,
which will be disastrous for cash flows.
Although the oil price has now fallen back from its peak, that
spike came as most farmers were buying for the season ahead. The
cost burden is now being carried in many trading accounts. Many
farmers also found themselves forced to make their fertiliser
purchases after prices had leapt dramatically some businesses could
be looking at a 150% hike in fertiliser bills.
Farmers must now have more working capital tied up in growing
crops or producing livestock than ever before, and to survive,
careful management is required. History suggests that farming has
performed well during previous recessions. But the credit crisis is
a new one and the cause of this economic downturn has hit farmers
as hard as everyone else. This includes those who invested heavily
to generate diversified income - for example, from farm shops - as
consumers rein in spending on luxuries and leisure activities.
Farm borrowings generally stand at an all-time high. Latest Bank
of England figures show agriculture and fishing debt standing at
historic highs and 9% higher than it was in the last quarter of
2007. Although the industry as a whole does not have a gearing
problem, the availability of further borrowing at realistic rates
may prove difficult for some farming businesses. It remains to be
seen whether the Bank of England's recent interest rate cut is
passed on in full to the consumer. If not, we may well be moving
into a period where, unless credit is already secured or cash is
available, the ability to make decisions within a farming business
will be limited.
Single payments
The payment window opens from 1 December. If you have been
notified by the Rural Payments Agency of any queries on your claim,
reply promptly and chase the issue up to conclusion. Outstanding
issues on a claim could and probably will delay the payment. Being
paid in December or June will have a significant difference on cash
flow.
Bad debts
The risk of bad debts through payment defaults is as high as it
has ever been. So include credit checking, bad debt insurance,
advanced payments and tight debtor control in your strategy.
Avoid surprises
Beware of unexpected payments. It is easy to forget those that
are unrelated to the day-to-day business, like Hire Purchase
repayments. Have you bought anything on credit which had a payments
holiday, and for which repayments will soon begin? Also beware -
companies and individuals may look to take advantage of financial
difficulty. Any deal that seems too good to be true probably is.
Always read the small print and seek advice.
Tax bills
Many farming businesses will have an income tax liability in
January 2009, following some reasonable profits in the last
financial year. It is essential to make a provision to pay this and
to plan for future tax liabilities.
Offset risks
Poor financial planning has led to some farmers becoming victims
of their own making. In June 2008 for example, nitrogen fertiliser
prices were rising rapidly and there were questions over
availability. While many ordered fertiliser, few reduced the risk
by selling grain hoping prices would return to their earlier
peak.
- Robert Hall is a specialist farm business adviser based in
Lincoln
Cash flow protection tips
- Budget, plan and benchmark
- Have a strategy for buying inupts and selling grain or
stock
- Review cropping area Ð strip out marginal acres
- Are livestock manures taken fully into account when assessing
fertiliser need? I
- Target fert and agrochemicals more accuratley with higher
efficiencies of application?
- Care for kit: Are tractor tyre pressures set right? Do
implements match tractors? Cut out unnecessary ÒrecreationalÓ
cultivation
- Has the higher cost of borrowing been factored into crop
marketing Ð e.g. An early grain sale with a later call option allow
you scope to catch a market rally but bring some income
certainty
- Explore alternative animal feeds and bedding
materials