NZ Farming Economic Resets
OPINION: The world is moving so fast that sometimes it's just a struggle to stay on your feet.
My advice? Look, listen, take stock and do the best you can do.
If there is one thing we can count on then that is the water issues of the past election will resurface for certain. In the interim, I would suggest that farmers nail down their water rights, water consents, water storage and water use efficiency.
Another area that will keep resurfacing is greenhouse gas emissions and we all need to keep abreast of new developments and farm management options helping to reduce emissions.
If a choice has to be made, then the education of farm children is more important than fertiliser. Around the world a lack of skills is starting to look more and more of a crucial issue. Quite a number of countries have a youth unemployment rate of 15-25 per cent and it is not decreasing.
The combination of another two billion people, increasing robotics and technology and the substitution of capital for labour will tend to widen this inequality issue of income and capital that many countries and their leaders are increasingly talking about.
New Zealand is fortunate that corruption may be present in few places, but around the world it is a major problem and affects people, business, crime and governments, and is probably getting worse. Cybercrime was a word we had never heard of only 10-15 years ago.
So, focus on what you can control and manage. It's so easy to say but the top operators in every business have trained themselves mentally to cope with this and they and their businesses are all the better for it.
Historically, farm working costs in New Zealand double about every 20 years so there is a constant upwards creep taking place. In 20 years' time the farm working expenses for sheep and beef will, on this basis, be about $130-$140 per stock unit, and the farm working expenses per kilogram of milk solids will be up about $7-$8/kg. Don't fight this – control and mitigate it.
What is the return you are getting for any marginal land you own? There may be other things in your backyard also that would be better off sold, almost regardless of what they cost you – cost only has a marginal relationship to value. One spouse's regular off-farm income can easily be the equivalent of running another 1000 sheep or another 50 dairy cows with no weather issues, hardly any costs, no weekend work and four weeks' definite holiday each year.
·Many long-term farming decisions are made driving the tractor and shifting livestock, preferably out of cell phone range. Keep doing this. Many farming couples have a favourite spot or place on farm to make decisions away from distractions..
Conservative cost budgeting is the order of the day. In the United States the sale value of corn was US $7 a bushel several years ago and some key decisions were made on this value. Today the value is just over US $3 a bushel.
Small changes can often have a big effect – such as an increase of 3 per cent in gross farm income and a decrease in overall expenses of 3 per cent. With a typical 3500 stock unit sheep and beef enterprise the writer was involved with recently, this up and down effect increased the bottom line by $24,600.
High personal drawings relative to the farm's net profit is always a pain and reinforces that the more you make the more you spend. Over time, if you don't want to live within your income then don't be in business and be a two income family. Curb that spending when it comes to machinery or plant and avoid "iron disease".
The world's indebtedness today is higher than it was before the start of the World Financial Crisis in 2007. It is all about financial leverage and an increase in the current interest rate by 1-2 per cent with any major degree of leverage involved is not something many bankers would want to contemplate let alone what you and I would feel.
Even the crackerjacks in New Zealand farming have found that maximum profitability tends to take place at about 93 per cent of a farm's potential profitability. The last 7 per cent of gross farm income is often offset by the last 7 per cent of marginal costs. Not understanding this issue just leads to stress.
In just about every farm type at the moment it is hard to get the farm working expenses to gross farm income ratio below about 60-62 per cent. This ratio is usually 3-3.5 times higher than the interest and rent paid to gross farm income ratio. The combination though of 80-85per cent really squeezes the profitability so focus on these two key areas.
You won't go broke if you manage your income taxes. Don't confuse material possessions with wealth. Acquiring material things will not make someone wealthy, but it will mean that you may need to work beyond retirement and your banker may be able to retire early.
Make sure compound interest – the eighth wonder of the world – is working for you. Iron disease is a good example of compound interest and depreciating assets having a love affair.
Synthetic meat and milk development won't do New Zealand probably much good, but the additional 2.5 million people coming through as new buyers will help offset this.
Lastly, if something sounds too good to be true – it probably is. Farming is nowhere near profitable enough to indulge in this area.
Pita Alexander is an accountancy and agribusiness director at Alexanders.