Think before you spend

Farmers need to do some soul searching now that their single payment cheques have begun to arrive, says Carl Atkin, Bidwells’ director of land and business research.

After several years of not facing the future, it is time for the industry to really start to make inroads into its medium-term business planning.

The time has come to do some deep thinking and consider some key questions.

What kind of business do I want to have in five to 10 years time?

How will I get there?

Are all my resources (property, labour, machinery, capital, management) really being put to optimal use?

Will my business still be a mainstream commodity business?

If so, how am I going to manage my business in light of increased risk and uncertainty from these mainstream commodity markets?

Will my business become a more rounded added-value food, leisure or diversification business? If so, do I have the necessary skills and entrepreneurial drive to take it there?

The key message with the payment is an obvious one:

SFP won’t go on forever – even if we get to 2012 without another major reform – and it will decline substantially in both actual and real terms.

Businesses should use the payment as an aid to restructuring, and start that restructuring in a planned and orderly way, sooner rather than later.

The tragedy for the industry is that some will choose a slow haemorrhaged exit through eroding their net worth over time, rather than face up to some tough and difficult decision making now.

The basic premise, of course, must be that all farm enterprise budgeting needs to take place without the single payment.

Businesses need to understand what the core, or residual costs are, that they would have to bear anyway, regardless of production activity and then they need to budget the additional costs associated with production and see whether it stacks up without decoupled support.

Soul searching questions must be asked about loss-making enterprises.

Why are they being propped up by this decoupled income stream?

The premise must be that core production business needs to be viable without any support.

For those who remain in commodity arable and livestock production, strategies need to be reviewed carefully.

It is difficult to see how large sectors of the commodity livestock sector can even begin to compete unless they move into differentiated or premium markets.

But the payment should be used or invested wisely.

SFP should not be used to subsidise unprofitable expansion routes or allow wasteful luxurious investment in new machinery.

If it is to be used to invest in a commodity enterprise where the return on capital is less than 5% then there need to be compelling non-financial reasons why this route is being pursued.

Having unprofitable livestock enterprises for aesthetic or lifestyle reasons is a fair argument, as long as the full costs and implications of doing so are taken on board.

Far better for businesses to appraise alternative investment sources, like converting buildings, where the returns will be more commercially acceptable.

Owner-occupiers are sitting on a large capital asset which is usually not being worked very hard, and which will increasingly need to be sweated in this new environment of a market-focused and market-driven agriculture.

The single farm payment presents a massive opportunity.

Other traditional industries have been forced to restructure without the luxury of a cushion in the form of the SFP.

But this will not go on forever.

The restructuring must begin quickly and rationally, but in a planned and orderly way.

It is a very exciting challenge.

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