Even in this ever evolving environment, there is still great opportunity to achieve growth in your agricultural businesses. You just need the right game plan.
There is a famous scene in the football movie “Any Given Sunday”, where Al Pacino is addressing his team before a big game. His speech is pretty inspirational, and focuses not around the big flashy plays or the individual brilliance, but around winning the game, inch by inch. The incremental, gritty focus on winning the small battles - of driving ultimate success by being prepared to forgo the big play for the many small plays. (you can click on the photo below and go to the video)
Watching the scene got me thinking about what success looks like in today’s world, and particularly in agriculture. The sector has achieved phenomenal growth and success in the last 2-3 decades by nailing the “big plays”. Whether it be dramatically improving production through irrigation, land use change, large scale development or buying the neighbours – the growth has typically been “big bang”, and largely funded by sourcing debt capital off the back of value creation and increased income.
But, for a whole number of reasons, that big bang growth is nowadays, much harder to achieve. Environmental limitations, access to capital, resource scarcity or simply a change in strategy mean growth is now taking on a different form to what it has previously. We are also in a world where growth via capital gains is not a current reality.
This is all feeding into a shift in mindset for farming businesses, as they grapple with the challenges of setting a growth strategy in a rapidly changing world.
Re-framing our Perceptions of ‘Growth’
To use a phrase doing the rounds currently, what does “re-imagining” growth look like?
As an example, I was out with one of our clients this week, and the discussion led to an opportunity to develop some border-dyke irrigated land to spray irrigation. As well as having environmental benefits and fitting with an overall strategy of driving a sustainable business model, the development has some real financial benefits as well.
The rough maths were as follows:
Don’t Just Default to Debt Repayment – Be Ambitious
For a business like this, making strong cash surpluses, utilisation of free cash is a challenging but great problem to have. The easy answer in the current environment (and often the one Bank’s are pushing for) is debt repayment. Whilst there is nothing wrong with that, paying down debt at 3-4%, versus a targeted investment on-farm driving a 15%+ return becomes pretty simple maths.
The Long Game not a Short Game
Yes, reallocating that free cash may not improve your loan-to-value ratio (LVR) or your Bank metrics in the short-term, but you aren’t in business for the short term. This is about making investment decisions that will drive long-term success by maximising your asset base and operating model to help you realise your aims and objectives.
Communication is Key
Remember, banks have a preference for debt repayment at present - so your communication needs to be thorough and compelling. The key is to articulate your rational to your Bank, and have a very clear strategy, supported by your planned investment.
Show them what homework you have done on the opportunity, how you will execute your strategy, and illustrate the benefits to your business that’ll result from the investment – short and long term.
In Change Lies Opportunity
The reality is that whilst growth may look different to what is has in the past, the options to grow are just as plentiful. Whether it be on-farm development, investment in infrastructure, changing up your operating model or investing off-farm, the opportunity to invest and outperform the cost of capital is very much still able to be achieved.
Surround yourself with people and advisors who can challenge your thinking, and who can help you unlock the full potential of your business. These people will help you re-frame what growth looks like, analyse the opportunities and give you the confidence to act in a manner that is best for your business, not in a manner that is focussed on satisfying your Bank.
The opportunities are there – it’s time to think laterally and realise the inches you need are all around you.
At NZAB we have the skills and experience to help you fight for those inches!!