Risk, Are You Prepared?

1st May 2013

I suspect most arable farmers in the north have just spent the last few weeks’ frantically drilling spring crops with the aim of making up ground after the desperate month of March and the poor establishment of crops sown last autumn. I know many are really frustrated that after having such a poor 2012 harvest, this year, yet again looks set to be the same.

With March being the coldest on record since 1962 with an average temperature of 2.2C, lambing has been a nightmare and the lack of grass growth during April has proven tough when turning stock out and supplementary feeding has been a necessity.

It just shows how exposed our industry is to the weather and no matter how hard we all try to mitigate losses or plan ahead, ultimately weather is the overriding influence, and just highlights the significant risk farmers participate in.

After a poor 2012 harvest and an extreme prolonged winter, high feed prices are a significant factor for livestock farmers. Coupled with silage yields expected to be considerably reduced, this undoubtedly causes real cash flow implications going forward.

Risk management in farming is something that many don’t consider or even factor in when producing budgets or cashflows. Anybody who participates in a trade or business is taking a risk with cash they invest and the theory is that the higher the level of risk, the greater the level of return, however, this is certainly not the case when we are so dependent on external factors such as the weather.

I know that the banks are already feeling nervous on some businesses, with expected incomes considerably lower than previously forecast, or in some cases, no income being produced at all. Whilst there is an appetite for lending to those with land as security, the importance of serviceability on debt is more of a concern for the banks, and this directly impacts on the cost of funds. It is vital that realistic budgeting and correctly managed cashflows are produced to provide the bank with an accurate picture of the business. Above all, good communication with your bank manager at an early stage should not be underestimated if things become challenging.

It is when things turn difficult that the need to plan ahead during the good times is emphasised. In years when profits are made, ensure that the driver of taxation doesn’t overtake the need to ensure reserves are left for the troublesome periods, which we all know, happens on occasions with this year looking to be no exception. Taxation leakage is an agenda item for many and extremes in profitability can causes short term problems if not carefully managed for the long term.

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