The record 2020 harvest and above-average incomes have provided an excellent opportunity for many growers to reassess their business goals and investments, farm business adviser Paul Blackshaw says.
Speaking at a GRDC Farm Business Update in Bendigo, Mr Blackshaw said 2020 was the best year many growers had experienced in a long time. He encouraged the development of strategic business plans to make the most of surplus cash.
“There is a range of opportunities where we can spend money in the business: do we put money into superannuation, reduce debt, or think about succession or retirement? The important thing is to have a business plan. You need to know what the end game is – where you are heading,” Mr Blackshaw, who works for Meridian Agriculture in Victoria, said.
“This will be specific for different generations, particularly in a family business. The end game is going to look quite different for the younger generation than the older one.”
He said business plans need to be discussed, then documented. “This plan ends up representing the shared goals and strategies of all the people in the business. It becomes a document that you can refer back to – and it is the road map for the business. This can help to take emotion and conflict out of decisions.
“What’s also useful in this plan is to have a wish list. After a year like 2020, when you’ve got some surplus in the business, what are you going to do? You should explain where you want to take the business in the future.”
Some “sensible” discretionary spending could be a good idea, too, he said. “For a lot of people, the past couple of years have come on the back of some pretty tough ones. So perhaps think about ‘blowing’ a bit of the profit. It will be good for your mental health, if nothing else. Imagine the pleasure of a new kitchen or a holiday. Don’t discount that totally.”
Retirement and succession
Decisions made in a good year can be more important than those made in a tough year, he said. Surplus cash could provide an opportunity to make the business more sustainable and profitable in the long term.
Part of the thought process should be considering future needs. “If in the future you need to think about succession, then you should start provisioning for it. And if the older generation is going to retire, perhaps you need to think about putting away some money to provide for that.
“If the business is towards the end of its life in its current form, then things like retirement and succession are a lot closer. If you want to put aside some money for succession or retirement, start early so the commitment isn’t that great.”
It is important to build your operation’s resilience during good times, Mr Blackshaw said. “When we have good years, what tends to happen is that the memory of drought years fades. So, when you have a good year, think back to those tough years and consider things you can do that might make those tough years a bit easier. Where can you invest money now that will take some pressure off down the track? That might be bringing in a reticulated water supply, or a hay shed.”
If off-farm investments are part of the business direction, it is necessary to think about the goals for those investments, he said. “What is the purpose of the investment? That, along with the timeframe and the size of the investment, will drive what type of investment it is.
“If you’ve got $10,000 or $20,000 that you want to put into an off-farm investment, then a factory on the outskirts of Melbourne isn’t going to be appropriate.
“Also, think about return versus risk. If you want to chase high returns, you’re likely to have to take a very different degree of risk than if you were willing to take a lower return. One of the safest investments is to put your money into a term deposit, but you’re not going to get a great return from banks at the moment.
“Do you want to ‘set and forget’ or do you want to actively manage these investments? If you are interested in managing an investment property or a commercial property, that is going to be different than if you just want to park money and forget about it.”
A business plan should also identify areas where on-farm investments are appropriate, he said. “Think about things that will increase productivity in a profitable way. That might be investing in some major costs, such as subsoil manuring or lime and gypsum, which put money back into the business and increase its productivity.
Think about opportunity cost: what if I took this money and put it somewhere else?
“Think about investing in areas that are going to reduce labour and make tasks more efficient. Also, one of the biggest drivers of profit is timeliness of operations. If you can invest to improve the timeliness of operations – for example, buying machinery that can move between properties more quickly – often that will pay significant dividends as well.”
Normally, on-farm investments should generate a greater return than the cost of funds: “If you can’t generate profitability or benefit from the investment that is greater than your cost of funds, you might as well pay off debt.
“Also think about the opportunity cost: what if I took this money and put it somewhere else? If I am able to put the money into some other investment in the economy that generates seven or eight per cent return, then an investment in the farm needs to generate more than seven or eight per cent.
“Some people will put a really high hurdle on that: unless I can generate seven or eight per cent on-farm, I’ll do something else with the money. Whereas other people say this is purely my cost of interest. So do the sums around your return on assets and put some rigour around the decision.”
If a grower’s overall return on assets is higher than the interest rate, there are likely to be opportunities to invest further in their business. “If you have a sustainable and profitable business, you can afford to consider growing it. If your overheads can be spread over a greater area, then growth can be a sensible decision.
“But there’s some point on the growth curve where you become inefficient. You get to a certain scale where you will have to buy another tractor or employ another person.”
Plant and equipment
Mr Blackshaw encourages investing in machinery that will reduce fuel use or minimise health and safety risks. “Don’t just go buy a new tractor – do some sums around it and know what the running cost is. You can save significant money by updating to something that uses less fuel.
“If you have run-down plant and equipment that has become unsafe, then replacing or updating that can be a valuable investment. There’s probably a range of things on your farm where you could spend some money to make them safer.
“Another area where you might invest to reduce risk is around timeliness of operations. If you are one of those people wondering how they will get their crop off in a wet year, you might want to invest in a second-hand header to reduce some of your risk in that area.”
More information: Paul Blackshaw, 0427 546 643, email@example.com