Assessing and reducing the risks on your farm

A recent article on risk management, produced by Sandra Martin, Senior Lecturer with Lincoln College in Canterbury, was a graphic reminder of the issues facing farmers everyday.

Most farmers and industry people understand risk, and your banker certainly does. A lender basically looks at the following three things:

  • Your ability to run the farming business, and service the debt. They look closely at your history, your current ability, your budgeting, etc., and assess your ability to run the business.
  • The level of debt as a percentage of the total asset. This will be assessed on all the things they take security over, which includes the land, buildings, shares and cows. They would be looking at the saleability of the property, the contingencies, ie, does it need a new cowshed, and the condition of the stock?
  • Can you service the debt? Can you pay your farming bills, run the property, pay the interest and principal, feed your family, and still meet your outgoings? Is the income stable, and what are the risks of a blow out and so on?
Some lenders do not like Northland for example, because of the likelihood of a seasonal dry, giving a production variation, which of course increases their risk.

One of the biggest risks is when the debt level gets too high, interest rates rise upwards, and pay-out trends down. You get caught with increase fixed costs on a reducing income flow, and the results can be very difficult.

It is very good at the moment as values are high, and there is plenty of equity remaining in the property. On a declining market, the opposite applies. Your equity is reducing, your ability to service reduces, and you are in serious trouble.

Put on top of that, a few hire purchases running over 3-5 years, high personal drawings, and the results are not only frightening for your banker, but for you to.

If you have too much hire purchase running, then your risk rises and so does your blood pressure.

Production and the cost of production is also another risk. Many farmers have gone into the high input farming with excellent results. Others have and found it difficult. It appears that you must utilise your pasture properly and then supplement, rather than supplementing and then feeding them what pasture is left.

It is clear that pasture remains the cheapest source of feed for cows, although it must be balanced. A well-managed high input business does reduce production risks, by minimising the effects of drought, stock health and empty cows etc., but at the same time increases the risks with the higher costs of production. Getting through the summer dry in a cost effective manner is very important. If you do not have a plan to get through the summer dry, then your production risks and production variations will rise.

Cow health is important too. A poorly managed herd with a lot of empty cows, down cows and eczema, will rapidly increase your risk.

And of course with the high input requirement of energy and time into farming, there is always the risk of a matrimonial dispute. Paying out 50% of the equity, could spell the end of your dream. Putting structures in place prior to entering your relationships, and looking after the relationship or marriage that you have, can reduce your risks considerably.

Excellent legal and accounting advice on key issues can also reduce your risk. Sourcing and utilising the best professionals you can find can be an excellent investment.

I do a lot of risk assessment, and I am amazed at the risks that some farmers are prepared to take to make further gains in their businesses. If you feel that your business is at risk then seek some help. Going down to the back of the farm and hiding behind the hedges does not provide a solution.

Talk to your banker, your accountant, your lawyer, your finance consultant. They can help assess the risks, and can help you reduce your exposure. This may include subdividing and selling off spare cottages etc.

In summary, risk management is a big issue for farmers. You need to think about all the things that may go wrong on your farm, assess the risks, and try and minimise the down side effects.

New Zealand has had six years of unprecedented pay-outs and increase in values. If that trend were to change, many farmers would find themselves at risk, and the results could make life very difficult.

Assessing risk and minimising it at every opportunity is the cornerstone of any successful farming business.


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