printStock Journal Feature - November 2023
Author: Chris Scheid, Moore Consulting
Red meat prices are down 50% since last year, an official El Niño forecast, interest rates have doubled in nearly 12 months… it’s not the situation that matters, but how you react!
If you can see the tidal wave coming it is too late! I think we can hear the cash shortfall coming, so time is still on your side. Let’s act early by looking at some financial strategies to assist your red meat and wool businesses survive this cyclical downturn to be able to thrive for the next up cycle.
Income – not much joy here. Unfortunately, it is what it is. It is absolutely a crying shame to have been selling quality cattle and sheep this time last year for excellent money and selling the same quality cattle and sheep for half that now. Your quality (with an accredited supplier assurance scheme) is still likely to be rewarded this year – less so in price but more so with kill space ahead of those without accredited quality standards.
Income will take a hit. As price takers, there is very little we can do to influence the price side and our production is largely on the ground now. We must therefore aim for and maintain quality when finishing livestock and examine the cost side to salvage some margin...
Examine each cost in your cashflow budget ‘line by line’. Does the cost supply value to me? Can I ask my supplier for some price relief? Some overhead costs can be negotiated e.g. insurance. I’ve seen farm insurance premiums rates +20% on last year. While we understand the River Murray Floods and floods over East have had some influence on your insurance premiums, have you asked your insurer to re-price? Brokers have a role here in insurance service delivery recognising that they will quote your insurance business out to a limited number of insurers.
Many suppliers to your business are passing on higher costs, expecting that the vast majority will not ask questions and accept higher costs. Those suppliers who receive questions from their clients will manage these clients, which might mean a lower cost (or some other assistance). Ask questions next week for a better deal. For your suppliers – ‘it is easier and less costly for them to retain a client, than to lose a client and have to win another one to replace you!’
Some costs such as council rates, professional fees, even chemical, fertiliser and animal health costs can have negotiated payment plans put in place. Your suppliers know your situation and empathise with you. Use this opportunity to replan repayments for when income flows back into your business.
Capital costs and capital projects (funded out of debt or cash) – think long and hard about these this year. Is the capital requirement in your FY24 budget a ‘need’ to have (and therefore has a suitable ‘return on investment’ established to pay its way), or is it a ‘want’ to have? Perhaps ‘wants’ are for the ‘up cycle’, and some ‘needs’ as well? We’re looking to survive the ‘down cycle’ and ‘cash is king’!
Take care with deferring livestock purchases (‘own now and pay later’). While these are tempting, they often come with 1%+/month interest charge. For trade livestock purchases, we put this finance cost in the trade. If the return on investment (including all costs) is suitable for the capital outlay, then we consider the trade. When financing, ensure that ‘trade livestock’ are financed with ‘short term finance’ (higher interest rate for short period) and that breeding livestock (keepers) are financed with long term finance e.g. term debt (longer term, lower rate)). Never buy breeding livestock (long term ownership) with ‘trade’ (short term) finance.
Machinery loans - typically upon financing, these loans have been initially funded with the refundable GST incorporated into the first few payments. If you’ve paid a deposit as well and maintained your P+ I repayments over the journey to date, your machinery lender is likely to have more equity in the machinery than principal owing. Negotiating with your machinery lender to ‘turn off’ some future repayments gets the equity - loan balance more level and will get you some more cash. How far ahead are you in your machinery payments? Make a call next week to find out.
Tax paid forward - many red meat producers have not had their FY23 tax financials prepared yet. Tax paid to date (and tax to pay forward) has been based on your last lodged FY22 year (a good financial year for red meat producers). Tax paid for past years can’t be changed but what the ATO often want when they see ‘good taxable years’ is tax payments paid forward (IAS / PAYG) based on your next financial year continuing to be ‘as good’ as your last lodged financial year. So if your taxable income for FY24 is likely to be significantly lower than your last lodged financial year, get organised and get proactive with your accountant to complete your FY23s, lodge and then reset your IAS/PAYG rate so that what you need to pay in IAS / PAYG in FY24 is what you need to pay, not what the ATO want you to pay! Better in your pocket now than an ATO repayment when you lodge your FY23 tax by May 2024!
Creditors (suppliers you owe money to or ‘bills in the draw’) - always a ‘courageous’ conversation to be had here but a necessary one for both you and the supplier. As a supplier of professional services to our clients, I welcome these conversations to assist clients. I would rather know and help clients than to just not know! Only too ready to assist with a payment plan that suits the client. Not knowing can lead to assumptions – right or wrong! Your suppliers are here for you too – it is a mutual benefit for each other – we exist for each other, with each other! If you’ve got ‘creditor’ issues, pick up the phone next week to ask them for a ‘payment plan’ that suits your cashflow circumstances. The call will bring you instant relief – and be welcomed by your supplier too!
If at the end of the examination of your cashflow you still find yourself short and require further funding, then we must have a conversation with your lender.
Loans – no point presenting the problem to your Agri Manager without a solution! They know the issues! Your solution to a cashflow crisis needs to be telling them the ‘what’ you’re going to do and the ‘why’ providing your solution written in the language of your Agri Manager - a cashflow reforecast (including assumptions) and commentary. Projecting your cashflow budget out to a ‘year in year out’ (steady state) assists your Agri Manager to see past the ‘rough seas’ of FY24 to the ‘calmer waters’.
If you have loans with a bank, then the bank is your business partner! All business partners like to be informed and your Agri Manager is no different. Your bank does not want to see you fail and so they DO want to assist you. Bank and farm business failure (mortgagee sales) does not reflect well on either party. For a bank, its ‘corporate image’ takes years to build up and minutes to breakdown (see Qantas the last few weeks)! If your bank does not know you need help, then they can’t help you! They DO want to know and they DO want to assist you.
Banks can consider - redrawing principle you’ve paid in past good years; permanent or temporary (90 day) extension to overdrafts; extending out the loan term (to reduce repayments now); converting P+I loans to interest only; reallocating repayments to suit the seasonality of your cashflow (e.g. annual croppers). These are all conversations to be had once you have provided your cashflow solution. Again, supply the problem AND the solution as written in your cashflow budget.
Where is further assistance available – take a look at family expertise available – perhaps your son/daughter having completed Ag Uni can assist – a great way to give them exposure to their first cash crisis; your farm business adviser should be leant on here for their ‘grey hair’ expertise and of course Rural Business Support is there to assist with their free Rural Counselling Service (1800 836 211) delivered by their experienced rural counsellors.
Who do you need to speak with next week?