Managing cashflow through a costly year
The first 6 months of 2018 will live long in the memory of farmers. Not many can remember two such vastly contrasting years in 2017 V 2018. One of the worst springs in living memory – The Beast from the East, Hurricane Ophelia and in recent weeks the longest heat wave in 40 years. It’s been a strange year so far.
So what do these climatic extremes mean from a cash-flow management point of view for farmers? Dairy and beef farmers are experiencing rising feed costs on top of already high feed costs from the spring. Ifac estimate that additional costs due to the heatwave are €2.50 per cow per day in a standard dairy system. This cost is made up of 4Kg of feed, silage plus a slight drop in yield. On a 100 cow herd this amounts to €1,750 per week. Every farmer’s costs will be different, depending on their own grass growth, cow type and stocking rate.
Grass is the key competitive advantage in Ireland for our livestock sectors. It’s this key resource that allows farmers to remain profitable in producing milk, beef and lamb. In the tillage sector the perception is often that they need the sun but crops need lots of rain to grow. It’s only at harvest that tillage farmers need the sun to shine. What tillage farmers really need from the weather is, little and often.
Livestock farmers are looking at fields with no grass growth, but animals that still need to be fed and more fodder that needs to be made for the upcoming winter. Many farmers are already starting to use fodder that they would have expected to keep until next winter. Because of that it’s essential that farmers do a fodder budget and establish if there will be any deficits for the 2018/19 winter. The earlier they know there is a problem the quicker they can address the issue. Farmers should be consulting with their Agri Advisors now on this matter. Ignoring the problem will make it worse.
If a farmer’s fodder budget for 2018/19 budget shows a deficit they will need to grow and cut more silage and /or purchase feed and /or rent more land. The deficit must be sorted to feed the animals over the winter. Dairy and beef farmers are already feeding more concentrates to livestock to make up for the lack of growth in grass. Roughly speaking concentrates are 3 times more expensive than grass as a feed source. All of these issues have a cost associated with them and will therefore have a direct impact on profitability and cash-flow in the business.
The financial costs of the first 4 months of 2018 along with the recent heatwave could have financial repercussions throughout the year. While there isn’t a crisis of feeding animals, farmers will not let their animals go hungry, the cost of maintaining those animals is growing the longer the warm weather continues. Farmers need to review their cash budgets; will they have enough money to cover the rising costs on the farm, the potential extra winter fodder that will be needed along with funding family living expenses, capital loan repayments and taxes?
If a business is starved of cash it can have long term financial consequences. Farmers should be hyper aware of their cash flow situation and should ask themselves these questions:
1) Do I have an accurate assessment of the current financial state of my business? 2) Am I confident that I have a cash budget to cover the full winter period into 2019? 3) Will there be enough cash available to cover all my financial commitments on the farm?
If the answers to those questions is no or maybe then farmers need to start planning for how they are going to fund the potential cash deficit. Banks hate surprise and it’s not easy for farmers looking to borrow funds to shore up cash issues late in the day.
Cash shortfall caused by fodder issues does not reflect badly on a farmer’s management ability. Taking timely action and speaking to the bank to arrange loan facilities to tide them over the lean period reflects well on a farmer’s ability to manage and reinforces lenders confidence in them.
Farmers should use their agri advisor and accountant to accurately review both their fodder and cash-flow budgets for 2018/19. At ifac our teams nationwide are always available to support farm families to make sound financial decisions, to complete budgets and to negotiate with the banks.