Information only disclaimer. The information and commentary in this email are provided for general information purposes only. We recommend the recipients seek financial advice about their circumstances from their adviser before making any financial or investment decision or taking any action.

Sheep and Beef farmers, and particularly those more heavily concentrated in lamb production have been through a tough couple of years on the back of low lamb prices, elevated farm costs and interest rates at decade long highs.

Unfortunately, this has meant that a lot of these farmers have made losses over the last year or so and for some that has meant bank pressure.   This pressure can take many forms - whether it be limited working capital, requests for a “revised strategy” (sometimes this is bank parlance for “we need you to materially reduce debt by asset sale”) or increased margins as credit risk has deteriorated.  

This is a triple whammy – high margins, at the top of the interest rate curve, at the bottom of the market for product prices.   Ouch.

It’s has also meant that sheep and beef farmers have lost their collective confidence – not just on farm, but also when dealing with their bank to ensure they get the best possible financing outcomes.

This can also lead to a large number of farmers thinking that they can’t refinance, and just accepting their current banking structure - even if sub-optimal.

But it doesn’t need to be like that.

We have many recent examples of successful financing outcomes for our sheep and beef farmers in the current market. This is despite some of these farmers having relatively significant cash losses over the past few years.

These financing outcomes often include much better margins, refinancing of any core debt sitting in overdraft, additional working capital to see out this part of the cycle and interest only terms that reflect their excellent security position.  

Most importantly, these farmers have renewed confidence.

Why and how is this?

Well, there are a few things at play at present:

1. Agri Bank appetite is relatively strong at present due to credit growth in other sectors being subdued. In general, housing credit demand is slow, and the margins are better in Agri for banks, so there has been an increased appeal among the banks at present for more Agri lending.   But as we’ve seen in the past, this will change (particularly if credit demand picks up in housing), so don’t rely on this being in play for too long.
   
   
2. Sheep and Beef LVR’s (loan to value ratios – or “security margins”) are really low. Most sheep and beef LVR’s are 30% or less with nearly all less than 50%.   They are a very strong asset backed security that banks never suffer any losses on.
   
   
3. Commodity pricing is cyclical and banks (particularly when appetite is stronger) are generally happy to take a look through approach with mid-term commodity pricing rather than what’s currently on the schedule.

But you can’t just offer up your books to get this done. What are the keys to success here?

Here are just a few key points to consider:

Don’t think about this process as DIY and employ specialist banking advice instead.  

Specialist banking advice may not mean your regular professionals either. A bit like piloting the complexity of tax regulations, navigating banking to a successful outcome requires significant experience, plus key relationships in the banking sector.  

Remember what’s at play here - a bad banking outcome will not only cost you a significant amount of money, but will also affect your confidence, impacting on your ability to invest for performance improvement. At its worst, a bad banking relationship can also mean having to sell an asset at the worst possible time -something that can cost significant equity.

Don’t just provide the basic financial information

Putting your financial statements and current year performance (plus next years budget) in front of a bank verbatim is unlikely to work. Not only has recent financial performance been difficult, but also your statements are often prepared to minimise taxation and may not reflect the underlying performance of the business.

\You need to be clear how the business is going to return to profitability, including what operational performance you expect to improve (and how) and why the prices and costs you’ve adopted are reasonable.  Returning to profitability also means that the business can show some ability to repay debt, even if it doesn’t need to due to a low LVR.  

Demonstrate your strategic governance and commercial decision making.

If the business can’t execute on its own plan to get back to a reasonable level of profitability, what other options have you considered and might enact if things continue to slide?   But this doesn’t necessarily mean that those options need to be enacted straightway, as it will come down to how much headroom, balance sheet options and overall leverage the business might have.  

Make sure you get adequate facilities and be realistic about what you need. 

Don’t set things up to fail from the start with facilities that don’t have enough headroom to cater for another downturn or things taking longer to rectify. Having to face into an early additional credit request because things haven’t panned out the way you hope is not great planning.  

There are many other factors at play too, but you’ll have to drop us a line to find out about them!

Too often, we see farming businesses that are exactly the same as each other with the same resources and the same performance - yet their banking packages are completely different.

Instead of getting charged a high interest rate and being uncertain about the future direction of your business, why not find out how you can enjoy the best possible banking package, plus a really clear strategy for the future success of your business and for your family.

We’d be only too happy to have a no obligation introductory chat. Call us on 0800 692 212 or contact us by email here and we can pop out for a chat.

Who is NZAB?