Payout Pain: Focusing on what makes a difference!

Following on from our article last week on being proactive around payout, we have been asked to share some of our observations around what has and hasn’t worked in the past. We’ve been here before after all!

Let me reiterate, a good business going into a tough year is still a good business. It’s not so much about getting through (although that is the first priority!), it’s about positioning your business and your mindset to be able to bounce strongly forward when profits return.

They say never let a downturn go to waste, and these environments are opportunities to showcase to your bank how effective your management and governance really is. The banks do a lot of stress testing of what might happen in certain circumstances, and this year may well be one of those years that looks like the stress test scenario.

What works:

• Facing into the realities of your situation as early as possible.
• Being honest with your bank and keeping communication lines wide open
• Challenge everything. Treat each dollar like a prisoner!
• There is a big difference between being optimistic, pessimistic and realistic. Being realistic is the key. This is not the year to target levels you haven't yet achieved.
• Go back to basics. Are you using the physical resources around you to the best of your ability?
• Get positioned for opportunity. What can you do differently if the payout jumps back up later in the season to capture more profit, but also defend the line if that doesn’t happen?
• If you don’t have experts around you, seek them out. It can be as simple as tapping into a neighbouring farmer who you think does things well.
• Selling ‘non-core’ assets can help. These are assets that don’t contribute to profit in any way. But there are often lots of reasons why we have these assets other than profit alone, so be realistic!

What doesn’t work:

• Blaming the bank. Yes, interest rates are back to some of the highest we have seen in recent times, and if they weren’t then we would be likely still making a profit this year, but that’s not something that’s in your control. Yes, interest rates are negotiable, but from a position of strength not weakness. (ie, if you need a lower rate in order to be viable, the bank isn’t likely to see that as a good risk for them).
• Putting farms or blocks of land up for sale that you don’t intend to sell. We saw a lot of this in 2016/17. It was a strategy to keep the banks happy, and it probably worked for a few for a while. But then the blocks didn’t sell, and the relationship got tougher. If it’s not a genuine option, don’t go there.
• Setting tight timeframes on assets you do wish to sell. (And this is aimed at the banks as well!) Clearly, the farm real estate market will be slower this year. If funding approvals are based on requiring a farm property sold within this season, there is a very high chance that strategy will fail, so be realistic!
• Focusing on production over profit. This may well be the year to produce a lot less milk and reduce the loss rather than maximise the output. But the answer to that lies in a clear understanding of your key drivers of profit and longer term strategy.
• Relying on Farm Debt Mediation as a way to solve any problems. Mediation is not a place to air grievances or negotiate a strategy, despite what you may think. It is a place where a ‘very final’ plan gets negotiated and agreed. You should never go to mediation without a clear plan that is 90% already agreed with the bank, or you’ll find yourself backed into a corner. And for the banks, don’t use mediation as a tool to force a predetermined outcome!

Putting it all in context is important:

Milk price margins do return to average. 

If you need re-assurance on this, take a look at our analysis of the last 20 years milk price margins. Click here to read our recent article on this We have had some great years, some horrible years, but the average is consistent.  

Costs do retreat too!

We are seeing fertiliser in full flight downwards, as are core feed supplies. Take a look at this article where we looked back at where costs retreated after previously high levels brought about by high payout. Farmers are very responsive to managing costs in the light of falling returns.  

Build a medium term forecast.

With the above in mind, once you have dealt with the short term realities its  time to start making a medium term plan for the business. Lean heavily on your advisors to help with this. How will the business return to more normal profit levels? what funding do you need to get there? What changes could you make to how you operate?

Show your working.

One of the best things you can do to gain confidence from your bank is to show them in detail what changes you have considered, especially the ones you didn't think were worth moving forward with. It demonstrates that you are thinking about all of the possibilities, and you are able to make clear decisions.

We are here to help. NZAB has a team of over 30 banking experts ready to help you work through this next period. If you would like to discuss any of the above, please get in touch.

We’d love to help. We’re all about better banking outcomes, so if you want to review your business to understand where you might sit, drop us a line today on 0800 692 212, email us directly, or fill out this form and we’ll be in touch.