Farmers need to get their finances in order before drought or a poor season starts putting pressure on cash flow.
This was according to Daneel Rossouw, head of sales of agriculture at Nedbank Commercial Banking. Roussouw was speaking during a Farmer’s Weekly-hosted panel discussion at Nampo Cape in Bredasdorp, which focused on El Niño and managing drought and heat stress.
Rossouw said climate was only one of the risks farmers had to manage, making it important to look beyond the next production season.
“If you don’t have a business plan, at least for three to five years, you don’t know where you’re going,” he said.
The plan should also be reviewed regularly as conditions and the needs of the farming business changed, he said.
Know where the business is going
A longer-term business plan needed to be supported by realistic cash-flow projections.
“A three-year cash flow forecast, for example, could help farmers see when financial pressure was likely to develop and thus plan major investments before the money was needed,” he said.
It could also help both the farmer and the bank understand what the business was trying to achieve and how those plans should be financed.
However, Rossouw stressed that farmers had to take ownership of the numbers.
“Some farmers still expect banks to prepare their cash-flow forecasts for them”, he said. “While a bank could help farmers work through the figures, they ultimately have to take responsibility for understanding what money is coming into the business, where it is being spent and what lies ahead.”
Match the finance to the asset
Farmers also needed to pay closer attention to how different assets were financed.
Problems could arise after a good season when a farmer used short-term funding to buy a tractor, implement or other asset that would be used for many years.
The purchase might seem affordable at the time, but repayments could become difficult when the next poor season arrived, he said.
Rossouw added that the financing period should therefore be appropriate for the life and purpose of the asset.
The same principle applied to the broader financial structure of the business. Short-term production finance, capital expenditure and personal living costs should not simply be treated as one pool of money.
“Keeping these needs separate give farmers a clearer picture of where financial pressure is developing and makes it easier to plan ahead,” he said.
Talk before there is a problem
Good cash-flow planning also gives farmers time to act.
Rossouw said that if projections showed a farmer might struggle to meet an instalment six months down the line, it was time to start speaking to the bank. Farmers should not wait until the payment was already missed.
“Talk to your financial partners, whether these are banks, co-operatives or other institutions. Be proactive,” he said.
He explained that starting the conversation early gave both the farmer and financier more room to examine the debt structure and possible solutions before the situation became critical.
“Debt restructuring becomes much more complicated once a farmer is in financial distress.”
Climate adaptation comes at a cost
Some of the measures farmers could use to reduce climate risk also required substantial investment. Rossouw pointed to irrigation and shade netting as examples.
He said water rights alone could cost about R250 000/ha in some cases, with irrigation infrastructure adding considerably more. Shade netting could cost roughly R450 000/ha to R500 000/ha.
These were therefore not investments that could be justified simply because of an El Niño forecast.
In high-value horticultural crops, such investments needed to form part of a much longer-term strategy and still make financial sense within often tight margins.
For banks, the challenge was to find financing structures that enabled farmers to make worthwhile adaptations without placing too much financial pressure on the underlying business.
Looking beyond the balance sheet
Rossouw said banks were starting to rethink how they assessed agricultural risk.
Historically, risk assessments had relied heavily on financial information such as past profitability and assets.
The difficulty was that a farmer could adopt conservation, regenerative or other climate-smart practices without the benefits immediately showing up in the financial statements.
“The farm might already be becoming more resilient, but it could take several years before those improvements translated into stronger financial performance,” he said.
For this reason, banks were starting to look more closely at information beyond financial statements and to work with industry organisations and research bodies to better understand what was happening on farms.
Rossouw acknowledged that this was still a developing area and that banks did not yet have all the answers.
Don’t diversify into bankruptcy
Diversification could help spread risk, but Rossouw cautioned farmers against moving into an unfamiliar crop or enterprise simply because it appeared to offer better prospects.
“You can diversify into bankruptcy as well,” he said.
Farmers needed to start with what they already did well and carefully assess whether a new enterprise suited their land, water resources, skills and financial position.
In water-scarce areas, Rossouw said the calculation was increasingly about the profit generated from the available water, rather than simply yield or income per hectare.
Reliable research and sound financial information were particularly important when farmers considered less familiar crops or enterprises.
“The aim should be to spread risk without undermining the parts of the business that were already working,” he said.
For Rossouw, preparing a farming business for drought therefore started long before the rain stopped.
Farmers needed to know where the business was going, understand their cash flow and ensure their debt was structured appropriately. Most importantly, they needed to start talking to their financial partners while there was still time to make a plan.
