NZFarmer : February 3rd 2009
16 Straight Furrow • February 3, 2009 Finance Affordability index should give confidence by Peter Barnett The claim can be made based on analysis of the relationship between historical trends of the two largest factors that have tended to influence purchasing decisions of dairy farms and sup- port blocks – dairy payout and interest rates. T The easing of both at a similar time is likely to cushion any downward pressure of land values. Since the 2001/02 season, the price paid by Fonterra to its shareholders has tracked in the range of $3.63/kg MS (kilograms of milk solids) to $5.33/kg MS, until last year when it peaked at $7.90/kgMS. Over the same time, interest rates borrowers have paid to banks have followed a similar path, although influenced by other factors. While most borrowers tend to have portions of borrowing on fixed rates at different times, tracking the historical levels of HE affordability of buying a dairy farm or run-off is similar to last year. the 90-day bank bill rate pro- vides useful analysis of overall interest rate trends. Adding on a margin of 1.75 per cent to this provides an indica- tion of what farm borrowers may have been paying over time. The graph (Fig 1) shows the relativity of average borrowing rates and milk solids payout over the past eight seasons (payout for 2008/09 calculated based on an estimated $5.15/kg MS with interest rates for the last five months of this year based on general main bank consensus forecasts). To measure the combined affect of both payout and inter- est rates, I have created a Dairy Farm Affordability Index – simply put, this is a measure of how many kg MS at the prevailing payout would be needed to ser- vice the interest cost of one mil- lion dollars of borrowing at the prevailing interest rates. While this index does not mea- sure other costs of production on a dairy farm, we know that feed, fuel and fertiliser are easing this season from last year’s highs. The index (Fig 2) shows the seasons between 2002 and 2007 have been comparatively the most expensive years for dairy farmers to service debt, as the gap between payout and interest rates were at their widest. The large lift in payout to $7.90/kg MS last season brought about a significant improvement in affordability as incomes grew, outstripping the continuing firm- ing in interest rates driven by world-wide demand for money. While this year’s milk solids payout is a major reduction on last year, at the same time world- wide interest rates have crashed with bank forecast consensus seeing further falls towards the middle of 2009. The combined effect is that a similar number of kg MS are required to service a $1m loan as last year. How this analysis will be inter- preted by people will depend on their own position; however it is based on historical facts and rea- soned logic. While there is still uncertainty in the world economy, as interest rates drop toward historically low levels, it should give all par- ticipants in the rural economy more confidence in their deci- sion making and should act as a shock absorber against any sig- nificant land price adjustment. Disclaimer The above are the opinions of the author only and based upon his background and experiences of seven years selling rural prop- erty and 12 years as a rural bank- ing manager. Accordingly readers should not solely rely on this informa- tion and should do their own research before making deci- sions. • Peter Barnett, B.Com (Ag), Rural Sales, Bayleys, Feilding A REMINDER! THE New Zealand’s Gold Lamb Awards Just a quick reminder to get your entry form in for the 2009 New Zealand Golden Lamb Awards. Open to all New Zealand Sheep Farmers. Entries close 5th February 2009. PROUDLY SPONSORED BY: Call into your nearest PGG Wrightson Rural Store for your entry form or go to: www.beeflambnz.co.nz for entry details Write a budget and impress the bank By BARBARA GILLHAM here is no denying those farmers with a healthy cash flow are in an enviable posi- tion, and better able to handle the fluctua- tions of the economic climate. A clichéd expres- sion currently being bandied about is “Cash is king”. With the current financial uncertainty, just what does this mean to the New Zealand farmer? It is a reference to the importance of cashflow in the overall fiscal health of your business. Without it, your farm may be far from financially healthy. The first step is to have a regularly updated budget. While some may view this as a daunting task, farmers who take the time reap the rewards. They know exactly where they stand financially and can make informed decisions regarding what changes, if any, they may need to make. These are also the farmers who invariably achieve a higher profit because they make decisions based on fact, not guesswork. The budget should be viewed as a financial map that will help you maintain the direction of your business, while putting you in control. The trick is remembering it is a living document and updating it frequently. With banks requiring a balanced cashflow, the T importance of updating your budget cannot be over-stressed. Farmers need to be able to demon- strate their cashflow potential. As with any job on the farm the right equip- ment makes the work easier and ensures it is done correctly. Managing the financials of the business is no different. One company with many years of experience in finance is CRS Software in Masterton. Managing Director Brian Eccles was a success- ful farmer and has an understanding of the partic- ular difficulties facing farmers today. His compa- ny’s program Cashmanager Rural is designed especially for farmers and uses language farmers understands. While warnings to tighten our belts are certain- ly worrying, they may provide the motivation needed for many to prepare a budget. Those that do will be in a stronger position to handle whatever may happen this year. Many people put off getting started, thinking it will be difficult. With a small investment in Cashmanager Rural farm management software, they will be on the way to having a budget prepared and a Cashflow report that will impress their bank manager. NOT TO FORGET TO ENTER THIS YEARS...
January 27th 2009