26 December 1997

SENSIBLE TO SPREAD RISK

Farming is a risky business.

But as every student of economics knows, the reward for risk taking is profit.

Unfortunately, the current state of agricultures finances would seem to challenge that theory, as the risks mount up and profits, on many units, all but disappear.

A glance at the charts for the various commodities in this weeks Business section demonstrates the point graphically. In almost every case, they reveal two years of steadily falling prices as the full impact of sterlings appreciation combines with a host of other problems.

But chances are farmers who aim to manage their risk in a structured way will at least achieve better control of their businesses and so generate a more stable flow of profit.

For example, in the area of capital investment and borrowing, there is a whole range of packages and facilities that help the farmer spread his risk.

Repayment terms are almost infinitely variable, enabling the farmer to match his borrowing to his cash flow and to the expected life of the investment.

The cost of borrowed money also varies greatly and it always pays to shop around. The more risk-averse farmer may wish to lock in at least a part of his borrowing to a fixed interest rate. Average rates have been hovering around the 7.5% mark for a few years, rather than the 10% seen over a longer time scale.

Where they will go from here will depend much on the UKs position with regard to the single European currency. But one thing is for sure. As long as the UK is outside the euro, rates, like currency, will remain volatile and fixing a proportion of debt will make good business sense.

Closer to home, managing risk on the farm is increasingly important – as has been recognised by the UK 200 Group of agricultural accountants. They have launched a new Risk Management Service, or financial health check, to help farmers achieve better financial control, and hopefully better profits. Getting in outside help can pay, with a fresh pair of eyes often seeing things someone too close to the business can miss.

A similar line is being adopted by the NFU Mutual which has launched a new company to assess risk on farms. These are the physical risks associated with farming – but the financial consequences of getting it wrong are considerable.

Then there is the matter of retirement and worrying whether the farm will generate enough income to support two generations. The risk averse farmer should be getting to grips with pension planning at an early stage – the longer its left, the more painful the process.

As ever, taxation matters get a high profile – not least with the Chancellors 1998 Budget looming and a major overhaul of the capital gains tax laws and inheritance tax arrangements expected. Its been said before, but the next few months probably are the final opportunity for farmers to get their houses in order on these two fronts.

Certainly there are actions that can be taken in almost all areas of risk management – but only if farmers are prepared to recognise the problems, make use of outside help and then do something about it.

The risks of doing nothing are considerable.