We’ve been hearing a lot in the media recently about how farmers are responding or reacting to reductions in Fonterra payout. We’ve also been working through these changes with our clients, and it’s really pleasing to see how resilient these businesses are becoming to these changes.
One of the key factors I have observed that make these businesses resilient, is the shift of focus from short term to medium term planning. That’s a change in mindset from reacting to change to running a business that expects change, and has an operational model geared around this. The confidence that comes from having a medium-term plan that everyone is aligned around is extremely powerful and drives much better performance on farm.
Sounds great, but what does it mean in the real world? What can you tangibly do to gain the confidence to perform? Here’s a couple of thoughts;
1) Budget around longer-term average payouts, rather than the forecast peaks and troughs.
It’s tempting when there is a good payout forecast at the start of a season to factor all of this in to the budget and lock in plans against this. However, too often we see payouts start strong, only to reduce when more market drivers become known. That often means predictions around amortisation, capital expenditure and other tactical or strategic initiatives are unable to be funded, resulting in negative conversations with banks, or even just a negative mindset for the season.
Let’s look at the numbers. Over the last 10 years, the Fonterra payout has averaged $6.41 inc Dividend. In those 10 years, there have been two high payouts ($7.90 in 2011 and $8.50 in 2014) and two low payouts ($4.65 in 2015 and $4.30 in 2016). The remaining 6 years have been within $0.38 of the average. If we forecast a $0.25 dividend for this coming season, we’re going to hit $6.50, which is $0.09 above the average. Still a good result!
So, you can see the difference in mindset and planning if you’d set the season up to need $7.00 vs using $6.41, one is behind, the other still ahead.
2) Lock in regular monthly principal repayments with your bank, in line with your average cashflows
One of the biggest drivers of confidence comes from having long term access to capital. One of the best ways to ensure this is through improving your credit rating with the bank by making regular scheduled principal repayments. Banks will want to stick to industry accepted terms like 20yr repayment periods, but you should look to offer what makes sense from a cashflow perspective. Resist the urge to offer up free cash later in the season, as experience suggests that these cash surpluses don’t appear.
3) Be pro-active with your planning for capital expenditure
Farms need gear, and that gear needs to be replaced. You can’t avoid it. But get proactive and have a strategy with funding requirements for replacement items planned out. Confidence comes from having a plan that you know you can execute, and for some farmers, it’s something to look forward to. Stick to the plan, and don’t get side tracked with special deals on tractors that occur before you plan to replace.
It’s a good idea to start thinking ahead for other capital spend requirements that the business might face. Fonterra shares, effluent, housing, laneways etc. They all need to be planned for. Confidence comes from having no surprises for the bank.
4) Communicate with the bank regularly and professionally
One of the biggest lessons I’ve ever learned is that you can never over communicate with the bank. When the relationship is collaborative, professional and accurate, the bank tends to support well beyond normal parameters if needed. If the bank is confident that you’ll identify and solve problems as they arise before they have to step in, they’ll back you.
We’ve seen an evolution of tools and technology that help with preparing financial information for reporting, but with this comes that danger of misinterpretation. Your communication should lead the interpretation of your financial data and tell the story of what is happening. Never send reports to the bank without commentary, and an update of forecasts.
In summary, confidence comes from having a plan that can endure volatility. Confidence drives mind-set, and mind-set drives performance. It’s about lifting your horizon, thinking further forward than just this year, and making use your farming team to ensure you know how to do this practically, how to make the plan, how to communicate it and how to monitor it.