Bumpy ride the new normal in farming

Farmers need to budget for volatile trading times.

The swings and roundabouts of global commodity prices and the value of the Kiwi dollar need to be seen as the new normal for the country's primary producers.

That's according to Larry Mitchell, an agribusiness adviser at professional services firm Crowe Horwath.

Mr Mitchell said while volatility in business is to be expected, most primary producers had experienced a bumpy ride in recent years. With that background he said it made sense for farm businesses in general to invest time and effort into careful budgeting and cash flow planning to weather the unpredictable times.

He said the dairy sector had seen the "heady" payouts 2013-14 rapidly fall into their current trough with the associated uncertainty around a recovery timeframe.

"This has created real pressure for many. However, while this is a case in point, it illustrates that as a globally traded commodity any agribusiness faces volatility risks where markets can and do change regularly."

He said Fonterra made seven announcements during the 2015/16 season to advise the forecast milk price for the season. Of these announcements, four resulted in a forecast price change.

"Good practice would be that at a minimum, Fonterra's suppliers should have altered their original budget four times during the season to account for these changes - and then reforecast their position."

Mr Mitchell said that background made a strong case for optimising cash flow through careful planning and preparation.

"Getting a clear handle on budgets and cashflows is good business practice that should be undertaken in the good times as well as bad. In fact, the point of planning is to give your business the resilience to ride the lows - even though you may have little to no idea when they might come," he said.

He said putting together cashflow and budgets starts with taking the time to honestly evaluate spending patterns for the business.

"Once budgets are established, stick to them. Avoid the temptation to spend a little bit extra here and there; the extras quickly add up and soon you could be looking at a significant amount of unplanned expenditure over the year.

"And don't fall into the trap of spending money just because it is available. That's a dangerous mindset which can be difficult to break out of.

"When the market shifts downwards, it will be harder to cut back spending. Tough times call for tough measures and potentially there are a lot of negative impacts if you don't plan ahead," Mr Mitchell said.

Budgets and cashflow analyses should be routinely adjusted as situations change throughout the year. Planning in real time means taking into account the inevitability of change and responding as it happens, rather than well after the fact.

"Using good accounting software and working with your adviser provides for adjusting budgets and forecast cash flows based on the most current information available around your revenue and associated costs."