Farming for cash rather than capital gain

The message has got through: farmers can’t rely on capital gains, good cash returns are necessary for reinvestment.

IT HAS been a while coming but farmers are changing their investment behaviour from farming for capital gain to driving cash surpluses for reinvestment into productive assets, says Westpac head of agribusiness David Jones.

“It’s fantastic to see this building across the industry.”

Farming for capital gains might be alright when land value is increasing and incomes are healthy. But for most of the noughties incomes were poor and too many farmers were eating into their equity to stay afloat and had nothing for reinvestment.

“We are starting to see some confidence coming into the market where people are actually looking at improving productivity and reinvesting in their existing operation through retention of profits — bringing in new money (financed or private equity) to drive efficiencies and productivity.

“People don’t have as high a cost to get into an industry as before because capital values have come off land assets.

“While it has hurt some (through reduced equity), financially it is good for the whole agricultural industry, including the support industries.”

“Although we are coming out of a global recession and people will take their time before making decision to spend again.”

He says people are still wondering and waiting to see if there will be any further drop in asset and commodity prices, and in fact if the bottom of the cycle had been reached yet.

“Basically, it will be a willing-buyer, willing-seller scenario that will make that call on asset values and be supported by confidence around access to funding, commodity prices, currency and interest rates.”

“We really are in a bubble at the moment — we have managed through the highs and lows of markets, with volatility in the market still out there. Any investment needs to have an air of caution with it but there are still good opportunities in the market to do business.

Land sales have been slow but I’ll be very surprised if prices go any lower. Buyers have been cautious and banks have tightened lending criteria but confidence is returning. No-one is expecting last season’s high prices again this year, but forecasts are for reasonable returns.

He believed climatic events had as much if not more impact on farmers than an economic cycle.

“Generally, when you go through drought or a flood the implications are such that it takes time to restore the property, pasture and build stock numbers back up. Climatic events also take a great personal toll and this is where we need to provide the greatest level of support to restore personal well being. These events take one to two or even multiple seasons to correct.”

Last September’s snow fall hit southern farmers financially and emotionally. Higher prices last season did a lot to compensate for the dreadful spring losses but it will take another good season or two to make up for the run of bad ones before that.

However, one of the lessons learned from the tough years is the importance of cash returns rather than reliance on capital gains.

Hat Tip: interest.co.nz

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