Drought: Assessing the health of your business

Reports provided by Massey University.
Reports provided by Massey University.

Repositioning your farm business for profitability:assessing the health of your farm business post-drought

Authors: Professor Nicola Shadbolt, Dr Dave Gray, Warren Anderson

When assessing the health of your farm you need to examine all three of the key resources - the biophysical (land, pasture, crops, animals, machinery, infrastructure), economic (cash, assets, debt, tax, inventory) and human (you, your family and your staff).

Optimum decisions on the use of the biophysical and the economic resources will only occur if the human resource is in peak condition, both mentally and physically.

Drought is not a sudden shock to the system like a flood, instead it is invasive, it slowly but surely grinds people down.

Farmers are well known for their emotional resilience, their ability to make rational decisions despite what climates and markets deliver, but it can come at a cost.

Whether the drought has broken for you or not, now is the time to give yourselves a pat on the back, a treat, maybe a day off the farm, a chance to relax.

For some the effects of the drought will continue for some time so it is important to take this break, regroup and then plan for the months ahead.

As you move out of the drought it is also worthwhile taking the time to reflect on what worked and what did not, what you might change to make it easier next time.

The impact of the drought varies across farming types due to differing supply: demand dynamics.

While dairy farmers have the immediate effect of reduced milk production, if this reduces the overall supply of milk to market it can result in an increase in milk prices, and vice versa (as witnessed last year).

This is captured, proportionally, in prices paid and can influence prices in the following year. 

The following year's production can be protected if cows are fed adequately once dried off and heifer growth rates have not been compromised by the drought. 

Dairy farms have an immediate cash cost of the drought, reduced income and higher feed costs.

Conversely for sheep and beef farmers the effect is reduced growth rates of stock and the need to destock earlier than planned with, at the extreme, the slaughter also of capital stock.

This increase in supply of stock to market most often results in a decrease in stock prices, both in the store markets and at slaughter.

The following year's lambing is often compromised as ewes can be lighter going to the ram so income in that year is less and is further exacerbated by the high cost of rebuilding numbers in a sellers' market.

Sheep and beef farms may not therefore have as high a cash cost in a drought year as their dairy colleagues due to stock sales but the impact of the drought continues well into the following year.

The primary focus during a drought is how best to manage through it.

This involves making tactical decisions about feeding levels, the use of supplements, stock sales and purchases, the management of the distribution of live weight within stock classes and setting priorities in terms of feeding levels.

Assessing your situation is key to planning.

Facing the 'brutal facts' puts you in the right space to make the best decisions; setting non-negotiable targets, monitoring these and initiating contingency plans to ensure these are met is critical for surviving a drought.

Once the drought breaks, the focus is then on how best to enhance the recovery out of the drought.

Again tactical decisions play an important role and these are about the use of supplements particularly nitrogen to improve feed supply.

They are also about reducing feed demand through grazing off and stock sales or the delay of stock purchases so that pasture cover levels can improve.

It is also about ensuring capital stock are protected such that they are in good condition going into winter.

Setting feeding priorities is important during the recovery phase as is monitoring and initiating contingency plans to ensure the farm recovers well.

The focus of this phase is to ensure next season's production is not affected too badly by the drought so that the farm can again generate healthy cash flows.

A key action plan is to prepare a set of budgets including inventory (stock on hand now and at some later date); supplies and contracts; pasture, crops and stored supplements (feed plan); cash (expected income and expenditure).

Another action plan includes a written calendar of key dates and resources needed, especially if you are delegating daily operations.

For successful action plans, seek independent advice from your farm management consultant, accountant, banker, lawyer and family doctor.

Explain your situation and get all base-line checks done now so that plans won't be delayed.

Each professional person knows someone else in a similar situation and can provide informed perspectives and key information.

In times of crisis, short-term fixes such as interest-only and deferred principal payments can only be approved by the lender of the borrowed money, but others can help you achieve them.

To ensure your plans are robust, make the time to do them, then to update them, away from other distractions; have the best possible information available, especially that from the professional advisers; involve partner and family; take the short and long view; be realistic; and recognise that you are the driver.

The final focus after the drought is to think about what has been learnt from this experience, the highs and the lows, and identify what you might change so that if another drought occurs, the business will come out of it in a better state.

Key areas to reflect on include the farm infra-structure, the farming system and the farm's marketing strategies.

The first question to ask is what infra-structure needs to be improved so that the farm can better cope with drought.

For example, with some farms it wasn't the shortage of feed that was the issue this drought, but the lack of stock water.

Things to reflect on include: water supply, shade and shelter, soil fertility levels and drainage, pasture species, access to yards and weighing scales, subdivision by aspect and contour, animal genetics.

Further investment in specialised infra-structure may relate to: water harvesting and/or irrigation, specialty pasture species (Lucerne, chicory, plantain), browse shrubs and fodder trees and the harvesting and feeding out of supplementary feed.

Any investment in infra-structure must, however, be assessed to determine that it is both profitable and feasible over time.

While it might seem perfectly logical after this summer to irrigate every possible hectare, you do need to do the sums to work out how sensible this is; it will be a trade-off between more debt and less risk.

In terms of the farming system, a key question to ask is whether it is flexible enough to cope with droughts.

In sheep and beef farms more flexible systems have a higher proportion of cattle, where the majority of these are trading stock often under a two year policy to provide further flexibility.

They may also run buffer mobs of trade lambs and ewe hoggets that can be sold if feed conditions deteriorate.  These systems also finish a large proportion of lambs and cattle before Xmas.

Stock purchases are flexible and tend to occur after the summer deficit.

Flexibility is also provided from the feed supply side through forage crops, alternative deeper rooting species and/or higher ME species (chicory, plantain, Lucerne, sub-clover), irrigation and supplements (nitrogen, silage, grain, maize silage and palm kernel).

For dairy farms similar feed supply tactics provide flexibility and for both farms having feed reserves, with the ability to purchase in years of plenty and store supplement, is also an option.

To reduce market risk, livestock farmers are selling when other farmers tend not to and buying when other farmers are not in the market, selling on contract to secure space, selling prime rather than store and buying and selling on the same market.

To reduce market risk for bought-in feed, farmers are using forward contracts or organising supplements and grazing earlier than other farmers.

When considering which strategies to adopt, remember that that the adoption of a strategy may reduce risk in one area, but increase it in another. Risk is rarely reduced, but it is transformed into a different form.

For example, investment in irrigation may reduce exposure to production risk, but it will also increase exposure to financial risk because of an increase in debt levels.

Similarly, contracts may reduce market risk, but expose a farmer to contractual risk and reduce flexibility in stock sales, increasing exposure to production risk.

In conclusion drought has an impact on biophysical, economic and human resources. It makes it harder for you to operate successfully.

To cope you will have had to modify plans, you and your family will have reviewed farm and non-farm goals.

Now the drought is over, for some, you will again modify plans to get through the winter, reflect on what you and others have learned and determine which goals now are the most important to the well-being of the people affected by the farm and its environment.