Farm Stocking Rates and Debt Levels

Drought & debt don’t mix

 Farming wisdom says costs are mostly fixed, so run as many stock as possible and it will produce the highest profits. Government calls that “increasing productivity”. I did that in my early days but then changed tack after listening to others and applying my Chartered Accountancy brain to it. Accountants are most interested in the bottom line – the profits you have to spend in return for running your farm. That is as much affected by stocking rates and debt levels as by seasons.

The problem is that farmers compete with each other in the saleyards and many other aspects of farming, including stock carried. The more stock they run the more it does in fact cost them to run the farm AND the more stock they turn off. That means more meat on the market. As the market is reasonably static, that causes prices to fall and profits fall with them.As a farmer I am interested in two things – the wellbeing of my stock and profit, or the return on my  investment in the farm. So I run well under the standard stocking rate. Perhaps 60% – 80%. Many costs do in fact fall, perhaps because the place does not run at such a frantic pace and there is not the same pressure on everything.Although we could store over 20,000 small bales of hay and used to do so, feeding out through winter, I changed that after one of Terrey McKosker’s “Grazing for profit” courses. I sold our three tractors, stopped growing Lucerne, stopped storing hay or fuel of any kind and decided to run only the number of cattle that could do “smorgasbord” or grazing only.In one big move, I cut turnover by 50% and costs by 90%. It made good, debt-free profit and was much more enjoyable to run the farm.

I don’t say it would work for everyone but as you recover from “drought flood and fire” you could try selling more stock as you reach 80% of what you would normally carry. By carrying more stock we keep more cash profit locked up , mostly in breeders. Sounds like good conservative policy. However, because it does not produce cash from the sale of those extra breeders or others held, we might have to borrow more from the bank or do without the money. It perhaps depends on savings.

The most destructive factor in farming is not drought, flood or fire, but debt. Interest and charges are outrageous but worse it is like getting stuck in a bog. The harder you try to get out, the deeper in debt you get. A seriously bad season or price collapse can turn manageable debt into a long term financial disaster. Our most satisfying and productive work in GBAC is rescuing farmers from the bog of bank debt. Sometimes we use a financial rope and sometimes a “snatch’em strap”. Either way they are pretty happy afterwards.

If those extra breeders and their progeny held back to build numbers have to be sold in drought conditions, which often happens, then the prices are pretty ordinary compared to if they are sold at the end of a wide-spread re-building phase or even in a normal season. So the same cash does not flow in.

When you do try these sort of exercises to see the impact on profit, examine your financial statements with someone who can analyse them properly for you to see what the result was. Figures can be very misleading and plenty of farmers are misled even more than they try to mislead the tax office. Get a financial analyst who knows both accounting and farming to work on what your accountant prepared for the ATO and see what surfaces. It can be very revealing.

Farmers who want to make good profits have to focus on profitability all the time. Many farmers focus on the appearance of their stock, homestead, yards, vehicles and fences, which has just the opposite effect on profit. Profit comes from maximum income with minimum expenditure. There is a sweet spot to deliver good profits and pleasant debt-free farming. It takes some finding.

Unblocking the flow of money

In this very unsettling economic climate where all around the world we are seeing major financial problems, many Australians are facing an uncertain future because their debt is piling up like a river blocked by debris. Once the blocked flowdebts accumulate it is extremely difficult to deal with them effectively at the same time as running a small business or farm or earning a salary. In addition to that it requires a fair bit of expertise and a good deal of experience. I have run GBAC, or Greg Bloomfield and Co since I launched my Chartered Accountancy practice in 1971. That has given me a good few years of experience.

As in the photo at the side, part of the solution is to delve into the blockage and one by one pull apart and remove the various components of the blockage. The details differ in every case but the problems and solutions are fairly common. Lack of profitability, bad economic times, natural disaster, government action or some combination of any of these usually lie in the way of stable business liquidity.

It is hard in the short term to do anything about specific damaging government policy, though FairGO with its liquidityVotergram service provides a good long-term solution in many cases. But frequently there is an immediate problem with a bank loan or overdraft and trade creditors. Instead of wading into the water and pulling apart a logjam it is necessary to contact all of the creditors and negotiate an appropriate payment plan. Most creditors are willing to accept this because they would like to continue supplying the business with goods and services and they have frequently had liquidity problems of their own at some time in the past. Bankers too, when approached in the proper way with the right explanations and some good options for the way forward, will generally do what they can to help because they also want the future business. The key is to provide them all with realistic achievable long-term solutions to get the debts sorted out.

Whilst many business owners and farmers are extremely skilled in the operation of their businesses and farms, many of them are not skilled at financial planning or negotiations with creditors and bankers. In such enterprises it is generally necessary for the owners to do pretty much all the work themselves, but when it comes to financial problems there is a lot of merit in getting an outside expert involved. In my own businesses and farms even whilst I was running my Chartered Accountancy practice, I was wise enough to gain professional advice from lawyers or other accountants when I needed it. It is foolish for any of us to believe that we have all the skills necessary to run our own businesses. The more immersed we are in the business the more we need outside advice to help us find solutions to difficult problems.

GBAC is dedicated to helping farmers and small business organisations overcome their financial problems in the same way that FairGO is dedicated to helping business and farm organisations overcome the problems their members have with government policy or actions. Don’t hesitate to contact me via GBAC if you think I can do something to help you it won’t cost you a cent to have a chat over the phone.

10 ways to Beat the Bank Borrower Blues

Unaffordable debt is a prime cause of business failure, like the “Phoenix” solution talked about in recent media – “Phoenix scams about to go down in flames”. Crooks crooksmay find that winding up one business and starting another works for them, but honest business owners can do a far better job that improves their credit standing and position in the community. Because business owners, particularly those with small to medium sized businesses, are often so busy running the business, they may not control debt properly at the same time. 

1. Take the demand notice seriously. Many borrowers put it aside as an idiotic piece of paper that fantasizes about a huge amount of debt. It should be dealt with immediately.

2. Call on the very best bank borrowing consultant you can, because you may be certain that the bank has already employed the very best of lawyers and the sort of debt collectors who figuratively wield baseball bats with a mean hand, to collect every cent you owe.


3. Get out your loan documents and letters and read them carefully with your bank consultant. You will see, perhaps to your surprise, that you have pledged to deliver your children’s hearts on a plate to the bankers if you don’t pay up. If not their hearts certainly their happiness in terms of their home and security.

4. Look inquiringly into what has caused the problem. Over-spending? Over-expansion? Losses? The economy gone bad? Government policy? Cash-flow crisis? Drought or flooding rain? What has caused this situation? Only by finding out can it be readily rectified. Was it purchasing too much property or a sudden rise in interest rates?

5. Look for refinance. That means approaching every other bank lender to see which of them will refinance the loan. It is important to act on this with your banking consultant as soon as demand notices arrive. But don’t apply until the business has been worked over for improvement.

6. It is far better to have looked for re-finance as soon as the loan facility became difficult to manage or payments became overdue. The earlier you decide to seek re-finance the easier it will be to obtain, if you have a half-competent consultant.

7. Prepare a very attractive and appealing bank loan application. Your consultant can do this. It needs 5 or 6 good photos to put new banks in the picture on what you do. Use accurate “management” accounts and only put your tax return at the back. The tax act allows a lot of items to be written off that are not really expenses, including owners’ salaries and capital improvements. Your consultant will reconcile the tax return with management accounts.

8. Take severe cost-cutting measures and work hard to cut costsincrease income in order to increase profits. Reduce capital equipment and stock on hand to provide extra cash. Don’t take little steps in this exercise. Be ruthless! Remove the dead wood and overcome lack of return.

9. Force the business to earn profits you can draw out. Put them into a special “savings” account to make major debt improve efficiencyreductions later. Paying off small amounts as you go does not usually work because the bank will often let you draw them out again.

10. Sell non-essential assets to clear debt. It is surprising how much money can be generated by the serious identification of surplus assets that just lie around and the conversion of them into cash.

“Borrower beware, sign with care.” Greg Bloomfield