Why a farmer has to be realistic

A farm can only produce according to its potential and what’s invested in it, says Roelof Bezuidenhout.

farm land
Assessing a farm’s production potential is crucial for good financial planning.
Photo: Roelof Bezuidenhout

A farmer with a big income tax problem usually has the means to pay an expert financial adviser, who typically guides the farmer on how to spend excess earnings on new equipment, infrastructure, or more high-potential land.

Many farmers, however, have far more difficult money woes, such as slow turnover, a cash flow deficit, or insufficient income. These farmers frequently lack access to experienced advisers, and end up making their own plans, sometimes getting into serious debt as a result.

There are no easy solutions. Farming is expensive, with input and living costs rising faster than inflation, and producer prices, with few exceptions, usually remaining flat for long periods.

Prolonged drought, hailstorms, floods, disease and market slumps, all of which can make sudden, unexpected demands on funds, don’t help either.

In light of this, farmers tend to fall into one of three groups:

The Savers
Farmers in this group are ultra-conservative, even pessimistic, believing that the coming year will be the worst yet. They see money in the bank as the safest way to manage risk.

So they live well within their means and reinvest very little in their farming enterprises. The advantage of this strategy is that they typically have enough of their own money to cover normal production costs and even emergencies.

However, indefinitely delaying expenditure on maintenance of machinery, fences, water systems and buildings can lead to trouble, because the increase in costs normally outstrips interest on savings.

The longer they wait, the more unaffordable replacement materials become. Yet items such as fertiliser, herbicides, stock remedies and new breeding stock have to be bought every year to enable farming to continue.

Similarly, fruit farmers have to plant new orchards from time to time to stay in the market.

Treading water and waiting for a situation to improve on its own may work; it may also be pushing your luck too far. You have to put something in to get something out.

The Spenders
These farmers can be unrealistically optimistic, hoping the coming year will be the best yet. While savers try to save themselves out of trouble, spenders try to spend themselves out of trouble, sometimes chasing a new craze on a whim.

Hoping to get rich overnight without carrying out intensive market research is usually an impossible dream.

A recent example of this is where farmers invested millions of rand in borrowed money to erect game-proof fencing and buy game at inflated prices, even after this bubble had burst.

Other examples are chopping and changing livestock breeds in an attempt to cash in on short-term price swings, or planting the wrong crop at the wrong time. These actions can be fatally expensive. If you’re going to spend, it’s crucial to spend your money on the right items for the right reasons. Risks have to be calculated.

The realists
These farmers strike a balance in their spending, but not without noting the old adage that if you don’t get bigger or better, it’s best to get out.

They farm in harmony with nature, and are realistic about their farms’ production potential, which depends on climate, soil, water availability and physical location.

Over-capitalising on a farm with low production potential can be disastrous, unless there is a good chance this expenditure will eventually catch up with inflation and generate a profit.

Examples are finding enough groundwater to expand irrigation or building a profitable feedlot.

Realistic farmers know that it can take a lifetime of hard work to build a thriving enterprise. They pay more attention to likely average scenarios than to what might or might not happen over the short term.

Even this is becoming more difficult, however, given new consumer trends and what appear to be changing weather patterns.

These farmers do save costs, of course, but usually where it makes sense. They try to spend every extra rand of income where it will give the best return.

They might diversify, but only where it’s prudent to do so. And they make off-farm investments, thereby avoiding putting all their money in one wallet.