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Meeting the Challenges - Key points for getting through droughts

Prepared by MAF
February 2008

Contents

• Introduction
• Contacts for information and advice
• Lessons from past droughts
  • Business Management
  • Farm Management
  • Make decisions for the right reasons
  • Tax Management
  • Buffering Business for the Future
• Animal welfare
• Human Factors
  • Warning bells
• Help for affected farmers

• Download pamphlet as a PDF [290KB PDF]

Introduction

The current drought is not the first, nor will it be the last to hit the farmers of New Zealand. While droughts affect every farmer directly, some survive, recover and prosper better and more quickly than others. Over the years, much has been written about why this may be so. It seems timely to revisit the lessons learnt from past droughts in New Zealand so that the farming industry and support services can collectively get through the current situation and recover when conditions improve.

This pamphlet outlines the key factors that contribute to improving the strength and sustainability of the recovery of farming businesses from droughts. Information is provided on the types of assistance available and where to get help.

Contacts for information and advice

Federated Farmers
Feed Supplies
0800 335 663

Rural Support Trusts
General Enquiries
0800 787 254

Work and Income
Welfare Support
0800 779 997

Inland Revenue
Taxation Matters
0800 473 566

Lifeline
Counselling
0800 543 354

Other information sources

www.maf.govt.nz/mafnet/rural-nz/assistance/
www.meatnz.co.nz/main.cfm?id=313
www.dairynz.co.nz/drysummer

Lessons from past droughts

Business Management

Make decisions and set dates to implement decisions early
The key factor which separates high income earners from the rest is the ability to make timely decisions. Every farmer should have at least an informal response plan in their head even if it is simple as a series of planned steps. Some decisions may turn out to be wrong, but more will be right. On top of that, recognition of a wrong decision will often reveal an opportunity. For example, quitting stock just before rain falls may be viewed as a wrong choice (although it was the right one to make at the time), but one which could open a raft of opportunities, such as buying in trading stock, taking on grazers, allowing pastures, to recover, and improving the performance of the remaining stock.

Plan the whole winter
It is a waste of money to feed too many stock for a period until money runs low, then decide that some stock have to go. Matching feed demand with cash and feed supply, while maintaining flexibility, is a characteristic planning exercise of strong businesses. Making early decisions is more likely to result in a better "per-head" performance and better profit than not making a decision until being forced to by circumstances, when no choices remain.

Update and revise plans regularly
Circumstances will change and so must the plan. The important thing is there is a plan and decisions are made from the best assessment of events at the time. As conditions get tougher, reviews should be more frequent.

Plan the recovery
Immediately rebuilding stock numbers when everyone else is doing the same will inevitably raise stock prices. Identify and explore other suitable options. For example, if stock prices are so high there is no profit for the coming year, an option may be to put the equivalent funds into a term investment and bring in grazers, make hay, or grow crop, for example. Perhaps there are some non-farming options for the sort term which are more profitable than buying stock at temporarily inflated prices

Focus on profitability
Successful farmers, like other business operators, only have a few irons in the fire which are profitable and well-managed in their own right. The best option may be to exit any enterprises which are not. Concentrate on tax-paid cash, not on how much tax is paid.

Cut losses quickly
Strong businesses recognise a bird in the hand is worth four in the bush. This may particularly apply when buying feed. Businesses will individually have a point at which it is better to cut losses and sell stock rather than continue buying feed. It is likely that strong businesses determine this point during earliest stages of drought and before any feed is bought in.

Farm Management

Drought indicator
Whilst droughts are difficult to predict, some farmers decide that a drought is occurring by identifying a specific indicator, for example, dry winter or spring, drop in spring pasture, or moisture status at a particular date.

Feed budgeting
The balancing of livestock feed requirements with pasture availability is the basis of profitable pastoral farming. Successful farmers use feed budgeting to plan 2 to 6 months ahead, providing advance warning of feed deficits and identifying trigger points for de-stocking.

Prioritise stock classed fro de-stocking early
This is part of the plan, so farmers know in advance which stock will go when a trigger point is reached. For example, the order for many sheep farmers has been wether lambs, aged ewes, ewe lambs, ewe hoggets, mixed aged ewes, and finally two-tooths. The use of technology may help make this decision, for example, pregnancy scanning will allow removal of dry stock, and separation for reduced feeding of single-bearing sheep.

Sell stock early
In previous droughts, high income earners have preferred to sell stock rather than buying in feed or grazing-off. A study showed 65% of above average farmers surveyed sold capital ewes which in normal circumstances would not be sold. They prioritise, plan sales and carry them out at predetermined dates, always matching feed demand to supply to maximise profit.

Feed stock as well as possible
Concentrate on per-head performance to maximise profit in the medium term. The best stock, fed well, will produce better offspring, giving better growth rates of both trading and replacement stock, and therefore better future reproductive potential.

Focus on maximising income rather than reducing costs
The scope to improve profitability by reducing costs is limited as most farm costs are fixed. With good planning and management, the small amount of money available during difficult times can be targeted to achieve the best return on each dollar spent. The result is a series of small improvements at low risk which together, over time, add up to a significant improvement. Top farmers spend relatively more on productive inputs, such as fertiliser, animal health, and weed and pest control.

Use irrigation water efficiently and profitably
Where irrigation is used, make sure irrigation performance is top notch, use soil moisture budgeting and allocate water to the most profitable enterprise. Plan for the consequences of consent restrictions being imposed.

Tax Management

The following advice comes from Andrew Vallance, Chartered Accountant, Roseingrave & Vallance Ltd, Masterton.

1. Do a reasonably accurate work-out of the operating cash result for the year. If this is too hard, write down what has changed - i.e. lamb prices down $10, sold an extra 500 lambs, for example.
2. Do a budget for the next financial year based on the status quo, or get help from your accountant, bank manager or advisers to do this budget.
3. Any provisional tax that has been paid can be refunded quickly if you file tax returns showing a reduced income, make and adverse event deposit and/or make a retrospective re-estimate.
4. Note that IRD allows "self assessed adverse events" for localised dry conditions, floods or sever incidences of stock disease.
5. Talk to your accountant about making an Adverse Event Income Equalisation Deposit. This allows you to sweep taxable income from selling extra stock (or not replacing traded stock) into the next financial year which is the year in which you would expect to make the loss after a drought.
6. When you get your tax demand for the next tax year, have a good think about what your profit will look like as you can estimate any point in the year, and re-estimate as things improve.
7. It's important to have a good grasp of what your true profits are. Tax is a secondary issue.
8. Many of you with dependent children will become eligible for family assistance, and can apply for fortnightly payments if you produce an estimate of the "family income" for the tax year.

Buffering Business for the Future

These steps cannot be taken immediately, but are important facts to examine with advisers and partners during times of relatively less stress so you are prepared for the next challenge.

Financial buffer

Aim to establish a financial buffer of 10-20% of Gross Farm Income (GFI), once debt servicing has come down below 20% of GFI. Remove this buffer from working capital into, for example, a term deposit - this forces better cash-flow management.

Structure of business

Is the current structure of the farm business the most appropriate to minimise tax, maximise flexibility and be in a position to obtain available assistance for support of the farm family? Investigate options with trusted advisers.

Type of business

Good business people recognise the separation between property investment, food and fibre production, and lifestyle, and weigh up the returns to each activity separately when making long-term strategic decisions on what business they should be in.

Human Factors

No two people are the same and we all have different strengths at different levels. Studies show people who work on developing their strengths in the following factors tend to improve their overall performance.

Motivation and determination: This is the key common factor found in studies of successful farmers. Do not lose interest during hard times - minimise losses and look forward to positioning yourself to take advantage of the good times with positive thinking.

Decision-making skills: Develop an ability to plan, decide on which steps to take and stick with your plan while constantly updating it. This differs from continually changing your mind as circumstances dictate.

Gracious with people, ruthless with money

Spouse/partner closely involved in decision-making, consultation and planning

A problem shared is a problem halved: Talk with friends, neighbours, Rural Support people, bankers, advisers, discussion groups, Federated Farmers, community support networks or anybody prepared to listen.

Seekers of information: High earners recognise it is what you learn after you know it all that counts. Listen to top advice, then make up your own mind whether to follow it.

Work hard and smart: Recognise that planning, discipline and goal setting are just as important as hard work.

Warning bells

The following points have been identified as signs all is not well in a particular situation, whether there is a drought or not. If you can spot the warning signs then you can make changes before the worst happens - the old adage is true: A fence at the top of the cliff is better than an ambulance at the bottom of the cliff. The issues can then be addressed before the problems become unmanageable.

Signals and behaviour signs which farmers and farm families should recognise as warnings:

• Less than total frankness with family and financiers.
• Peak overdraft greater than 30% of GFI over several years.
• Personal expenses always greater than 45% of net farm income.
• Plant purchases always on hire purchase.
• Debt servicing ration climbing slowly but steadily.
• Interest and/or rent payments greater than 30% of GFI.
• Ration of farm working expenses to GFI out of balance for a number of years.
• Tendency to spend on unproductive assets, such as cars or a house.
• GFI to market value of plant (including car) is two or less, indicating too much of income is needed to replace plant.
• Tendency to lack job satisfaction.
• Not matching a structural problem with a structural solution.

Behaviour signs which friends, neighbours, and support people should recognise:

• As stress mounts, withdrawal and a reluctance to plan medium to long-term is common.
• Along with low job satisfaction, decision making virtually stops.
• Behavioural changes among children at school.

Contact for Enquiries

Manager
North Island Regions
Sector Performance Policy
MAF Policy
Hamilton
NEW ZEALAND

Phone: +64 7 957 8313
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