Friday, December 1, 2023

Rate hikes and rough weather add to winter woes

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Cashflows are tighter this winter than in recent years, so that has added pressure on farmers.
Farm input cost rises are easing but a tough cashflow winter lies ahead, ASB acting head of rural Aidan Gent says.
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Tough months lie ahead for all farmers and orchardists with really tight cashflows, but cost pressures are beginning to ease, ASB Bank’s acting general manager rural, Aidan Gent says.

Cashflow pressures are immediate but do not reflect on the long-term viability of farming, he said.

The rise in the Official Cash Rate and the flow-on to interest rates, extreme weather events and sharp cost rises in fuel, fertiliser and feed have combined to generate pressure.

“There are options to deal with tight cashflows and we don’t want farmers losing sight of the fact these are fantastic industries to be in,” he said.

“The coming winter months are the toughest, regardless of industry, when animals and milk are not being sent off farm and the advance rate is lower.

“These are also months in which large farm costs are incurred for nitrogen, for supplementary feeds and annual repairs and maintenance.

“Also, cashflows this winter are tighter than in recent years, so that has added pressure on farmers.”

On the positive side, pasture growth rates and the ability to conserve surplus grass through silage have never been better.

Gent said input prices are starting to ease and the OCR is topping out, which means mortgage and business interest rates look close to peaking.

But the recent rise of 3% in farm business interest rates is a big cashflow item to digest.

In its latest Financial Stability Report, the Reserve Bank of New Zealand pointed out that the average interest cost per unit of production has risen from 50c/kg milksolids in mid-2021 to $1.20 today.

The force of that impact has been reduced by average dairy farm debt paid down from $24/kg MS at its peak in 2019 to $20 now.

That increased balance sheet strength means more options are available during downturns.

“Talk to your rural banker, because the situation may not need to be as hard because you have repaid debt,” Gent said.

Born and brought up on a Northland dairy farm, Gent said generations of farmers have had to manage tight periods and downturns such as those that are now occurring.

“You need to know your numbers, where your break-even line is, what you can do quickly to manage the squeeze.

“You have to talk to your rural professionals and advisers to make sure you are making the right decisions.”

Looking back five years, Gent said farmers were content to sit on low floating rates but now are considering fixing some longer-term rates because they are cheaper than the floating rates.

“But you should never take a fixed rate to try and beat the interest rate market.

“The reasons for fixing should include risk management in your business, because there is no right or wrong answer, every business is different.”

The June 1 farm transaction day was much quieter than in past years, perhaps only 40% of this time last year.

The tight cashflow, rising input costs and high OCR have not been conducive to farmers buying neighbouring properties.

Orchard developments have slowed down and farmers are spending on sustainability, weather-related improvements and technological inputs, he said.

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