Think Twice Before Buying That Machine!

Unfavourable climatic conditions, poor commodity prices and rising production costs are making it increasingly difficult for farmers to stay productive and run profitable enterprises on their farms. Glenneis Kriel asked three experts for tips that could help farmers weather the financial storms.

- Glenneis Kriel

Almost every business experiences financial difficulties from time to time. Farming operations, however, face greater risks than many other businesses, which makes it even more important for farmers to stay on top of their game.

Theo Rabe, CEO of agribusiness NWK, explains that farming returns are significantly lower than for most other businesses, averaging between 5% and 7% depending on the commodity. To make matters worse, farmers are price-takers, with little or no influence over the market. So a poor yield is not necessarily compensated for by a better price.

In addition to this, farmers have to cope with changing climatic conditions, and recent times have seen more droughts, changes in rainfall patterns and extreme weather phenomena.

To shield their businesses against these challenges, farmers should, first of all, be aware of their financial situation. According to Rabe, many do not have a clear idea of their income and expenditure.

DO A FINANCIAL ANALYSIS

A financial analysis will not only allow a farmer to evaluate the current state of the operation, but help him or her to predict future performance and make informed decisions by identifying wastage and areas where operations can be improved.

Nevertheless, predicting future performance is easier said than done, as many variables are at play. Ernst Janovsky, former head of Absa’s Agribusiness Centre of Excellence, advises farmers to base these predictions on longterm historic performance and to take into account long-term climatic and macro-economic trends, such as exchange rates and economic growth.

During the good years, a farmer should avoid overstocking or buying things that don’t add value to the business. It’s also crucial to save up for the tough times by building a feed bank, for example, or paying off debt in a ‘flexi reserve’ account.