Dairy Input Finance

Dairy Input Finance

5 minute read

The dairy industry has seen significant change and experienced some extreme challenges over the past few years. These changes and challenges have put pressure on cashflow and financing options for many dairy farmers. So, with summer fodder and hay season fast approaching, this month we’re going to focus on finance and cashflow options available to dairy farmers to make feeding your herd a little easier.

Like other types of farming, there are a number of financing options to choose from depending on your own circumstances. Let’s start with the most common.

Bank Finance

Like all types of agribusiness, the most common source of finance for dairy farmers is their bank. Generally speaking, support comes in two forms; term debt and overdraft. Term debt is most commonly used for land purchases or other long-term capital requirements. It is repaid over a number of years with principal and interest repayments usually made monthly or quarterly in line with milk payments. Overdrafts are fluctuating cashflow facilities used for working capital required to manage daily business requirements. Most dairy farmers would utilise both these forms of finance.

What are the alternatives?

For a bit of background, due to dairy farmers having the security of a monthly milk payment, milk processors and other dairy specific businesses have historically offered their producers access to finance. The reasons for this vary but the key ones include; ensuring milk supply through a financial obligation, helping producers grow their operations or assist producers to manage cashflow through tougher times. From the milk producers perspective, reasons for seeking alternative finance may include; the cost of finance, convenience, flexibility in milk processor, access to greater capital (than their bank may allow), access to unique capital, such as cows, and sometimes, lower barriers to entry.

Capital finance/growth incentives

This is where the milk processor supports a producer to increase their herd size or upgrade their operation. In turn, the producer agrees to supply the additional milk to the processor. Generally, these arrangements will be backed with a contract and require credit approval. These arrangements can also be supported by the producer leveraging shares or equity in the processor.

Cashflow smoothing

As with other types of farming, cashflow fluctuates with the season. In winter, milk supply is low and milk prices are higher. The inverse is in spring; milk supply is plentiful but prices are lower. Some processors can assist producers by smoothing their milk payments over the year, providing equal installments for ease of budgeting and cashflow management.

Advance payments

Advance payments are an arrangement where a processor offers cash payments in advance of supply to allow the producer to purchase production necessities (feed, machinery repairs etc) which exceed their monthly excess cashflow. Advance payments are recouped by the processor later in the year.

Herd (re)building finance

This is where a third party business assists producers to increase or establish their herds by purchasing (financing) cows on the producer’s behalf. This frees up cashflow now and allows the farmer to gradually repay the cost of rebuilding their herd while generating an income from the milk production.

Crop input finance – Agfarm Accelerate

Over the past 12 months, Agfarm has expanded its input finance program, Agfarm Accelerate, into the dairy industry. Agfarm Accelerate is a competitively priced line of credit for milk producers to purchase their winter and summer cropping inputs (seed, fertiliser, chemical, fuel), including feed supplements, grain, hay and fodder. Agfarm pay suppliers direct on behalf of the milk producer which ensures payment terms can be met and increases cashflow availability throughout the season. All credit facilities are repaid to Agfarm directly from the milk processor and you can choose any milk processor you wish to use. Accelerate is used in conjunction with other financial facilities, allowing producers to capitalise on opportunities when they arise. Finance terms run for a maximum of 11 months.

For more information on Agfarm Accelerate and how it can assist you to manage cashflow this season, reach out to your Regional Manager on the details below.

Reid Seaby
WA Regional Manager – 0439 625 853

Kate Phillips
SA Regional Manager – 0438 128 472

Anthony Hall
QLD & NSW Regional Manager – 0400 873 777

James Ryssenbeek
VIC Regional Manager – 0447 743 556

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Term Loans, Overdrafts and Specialist Short-Term Finance

Term Loans, Overdrafts and Specialist Short-Term Finance

5 minute read

The Agricultural lending landscape can seem complicated and difficult to navigate at times. There are multiple reasons farmers seek finance and multiple financial institutions offering a plethora of products. The five loans most commonly adopted in agriculture are short term finance, agribusiness line of credit (overdraft), term loans, livestock finance and equipment finance. The main financial motives are land purchases, capital expenditure or cropping inputs. Before making the sometimes-difficult decision of which product is right for you it is important to get the right advice and prepare the necessary business plan, cash flow projections and other relevant financial information. To make the decision a little bit easier, we’ve put together a quick summary of term loans and overdrafts and how they can complement specialist short-term finance options.

What is a term loan and what is it used for?

A term loan is a loan repaid in regular instalments over a set period of time. Term loans usually last between five and ten years but may last as long as 30 years in some cases. The customer generally has a choice of variable and fixed interest rates and may also have the ability to split the loan between fixed and variable to get that balance of certainty and flexibility. Repayments are generally principal and interest, but most financiers will offer the potential for an interest only period. This is a mechanism some farmers use to delay capital outlay while their assets get to a point of producing a solid income. Term loans are often used to facilitate large purchases such as property or making capital improvements such as new farm buildings or other infrastructure.

What is an overdraft and what is it used for?

An overdraft facility is a credit agreement made with a bank or financial institution that allows an account holder to use or withdraw funds up to an approved limit. The facility works like an approved loan where money can be withdrawn as and when required and the farmer is only charged interest on the amount borrowed and only for the time it was borrowed. The line of credit is generally given based on a client’s assets. The overall limit and the rate of interest charged is determined by the size and nature of the asset which is offered as security. Overdrafts are generally established for farmers who have short term cashflow needs and the balance is either repaid monthly or annually.

There are many different forms and functions an overdraft can have such as assisting cashflow, covering crop inputs, machinery payments, interest costs, term loan repayments, stock purchases etc. Farmers need to be cognisant of what they’re using the overdraft for and ensure the facility they choose meets their requirements. Consideration needs to be given to the loan term, repayment frequency, collateral required, flexibility and costs.

Why specialist short-term finance?

While the two above-mentioned forms of finance will always have their place, other seasonal finance options can at times be more appropriate and, in most instances, complement the above-mentioned loan types. For example, when using an overdraft in tandem with a specialist short-term facility such as Agfarm Accelerate, overdraft funds that may have been allocated to crop inputs can be freed up for other uses such as stock purchases, machinery payments and staff wages, increasing cashflow during the season and potentially decreasing the size of the intended overdraft.

What is Agfarm Accelerate?

Agfarm Accelerate gives broadacre and dairy farmers a line of credit at participating rural merchandisers for crop inputs such as fuel, agchem, irrigation water, fertiliser, lease payments, seed and crop insurance. Although this may seem similar to an overdraft, Agfarm Accelerate takes security over the future crop rather than physical property. The facility is paid post-harvest from commodity sale proceeds when cashflow isn’t as tight. For more information on Agfarm Accelerate and how it can assist your business’s cashflow, call your regional manager on the contact details below or visit agfarm.com.au/finance.

Reid Seaby
WA Regional Manager – 0439 625 853

Kate Phillips
SA Regional Manager – 0438 128 472

Anthony Hall
QLD & NSW Regional Manager – 0400 873 777

James Ryssenbeek
VIC Regional Manager – 0447 743 556

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The Banking Royal Commission and Agriculture


5 minute read

The Banking Royal Commission and Agriculture

Late last year, Agfarm published an article looking at the Agricultural lending landscape. This was written as the Banking Royal Commission was concluding and as we awaited the findings and recommendations. In this article we will look at these findings and the impact on both the rural and regional lending landscapes, particularly in the agricultural sector.

The final report handed down by the Royal Commission contained four main observations. These were;
1. The connection between conduct and reward
2. The asymmetry of power and information between financial services entities and their customers
3. The effect of conflicts between duty and interest
4. Holding entities to account

What do each of these findings mean?

As a summary, the royal commission found that in most cases poor behaviour shown by those in breach of the above-mentioned points was driven by the desire for profit for both the entity and individual (either personally profiting or their business’s bottom line profiting). The fall out from this was the customer and the customers best needs were not always a priority. Lines sometimes became blurred when those, whom a customer should have been able to trust, became both sellers and advisors. At times, customers were pushed into products based on profit for the financial business or incentive to the individual, not what was best for the customer.

The information flow, or lack of it, as detailed in point two showed that in many instances consumers were advised or driven towards products and offerings with little clarity around the finite detail of the products. The final report mentions “There was a marked imbalance of power and knowledge between those providing the product or service and those acquiring it.”

Many consumers came to use a particular banking product by way of a third party such as a broker, advisor or planner. Again, the report findings state in many cases the third party presented financial products to the consumer based on kick backs or incentives and not the best financial interests of the consumer. This was elegantly described in the final report as “An intermediary who seeks to ‘stand in more than one canoe’ cannot. Duty (to client) and (self) interest pull in opposite directions”.

Finally, point four found when those in the financial services sector did break the law and this was discovered, they were not properly held to account. In most cases the financial institution or individual was made to repay compensation and admit to their wrong doing by way of a press release. Again, in most cases, this compensation was a small percentage of the profits that would have been ultimately received.

How do these outcomes play out for those in the farming sector with regard to farm lending?

Farmers were long term campaigners for the Royal Commission and for years we have been witness to stories of farmers losing long held generational properties. It was therefore positive to see five days of public hearings specifically allocated to agricultural lending. The major outcomes from this were:

– Default interest should not be charged on loans secured by agricultural land in areas that have been declared affected by drought or other natural disaster
– Establish a national scheme for farm debt mediation and that mediation should occur as soon as possible after a loan becomes distressed and not as a final measure as has been the case in the past
– A separation of duties and conflict of interest by land valuation being undertaken by someone outside of the organisation with which the loan is held
– Ensure distressed agricultural loans are managed by experienced agricultural bankers and to recognise the appointment of receivers on a farm loan as a last resort

If these outcomes are implemented, they should go some of the way to rebuilding the long-held relationships and trust between a farmer and their banker. The government has already endorsed some of the recommendations such as the Farm Debt Mediation Scheme and agri banking specialists managing distressed farm loans.

What will change post the Royal Commission?

The findings and subsequent implementation of these findings will drive a strengthening in the industry and a more robust lending environment. However, as banks take the findings on board and revamp their practices, it is expected farmers will see small delays in approval when applying for loan and overdraft extensions. Farmers’ are also looking at alternative lending methods provided by the agri sector itself to replace, supplement and/or support the financial products portfolios of farmers.

Agfarm Accelerate is one of these products. Offered by Agfarm through CRT Rural Merchandisers, Agfarm Accelerate is a line of credit to purchase all your major crop inputs, such as agchem, seed, fertiliser, fuel, crop insurance, water and land lease payments. The credit is secured against your future crop production and repaid post-harvest improving cashflow throughout the growing season. For more information on Agfarm Accelerate and how it can assist you, call your local Regional Manager on the details below or visit agfarm.com.au/finance.

Information and quotes in this article have been sourced from Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry Volume 1. https://www.royalcommission.gov.au/sites/default/files/2019-02/fsrc-volume-1-final-report.pdf

 

Reid Seaby
WA Regional Manager | 0439 625 853

Kate Phillips
SA Regional Manager | 0438 128 472

Anthony Hall
QLD & NSW Regional Manager | 0400 873 777

James Ryssenbeek
VIC Regional Manager | 0447 743 556

 

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Financial Security 101


4 minute read

Financial Security 101

The world of finance is one of complexity, and in Agriculture where irregular cashflow cycles are the norm, finance is common place. Behind all finance requirements, be it crop inputs, livestock purchases, machinery purchases/leasing, land purchases/leasing or capital improvements, the financier (the company lending you the funds) will require ‘security’ to protect their risk. In this month’s article, we’re going to unpack the most commonly used securities.

Let’s start with some fundamentals;

What does it mean to have a ‘secured interest’? A secured interest means that in the event of default (for whatever reason) the lender has rights to that item ahead of non-secured parties.
Purpose. Lenders use security to protect their investment in the event that something goes wrong, for example the borrower cannot meet their repayments. Usually the lender won’t lend 100% of the value so in the event of default, their exposure is less than the item requiring the loan. This insures against unforeseen costs such as legal fees, interest costs or lower resale value.
First in, best dressed. Generally, the first registered lender is more likely to recover their investment verse those who come after. Note – Lenders who are second or third down the line, will often add additional costs to the deal to cover the risk of insufficient value in the item to cover their investment (after first secured parties have taken their money/value).
Removing a security. Generally speaking, a security can only be removed by the company/person who has registered it. Security is only discharged once the risk of default is zero.

What forms of security are out there?

Mortgage over property. Very commonly, a mortgage over land title is used to secure a deal. Mortgages are registered with the “titles office” a process that varies in each state and territory. The mortgage remains there until the lender’s risk is zero. When there is a mortgage in place, the users of the land may be restricted in what they can do without the permission of the mortgagee. These include things like taking on additional debt, subdividing land or leasing or selling the property. Mortgagees may also require the user to insure the property. Once the mortgage has been repaid, the lender will discharge the mortgage and give title to the owner.

Personal Property Security Act. The PPSA is specifically designed to give users a security interest in a ‘good’ that can be removed from a property or have a registration number such as a VIN or chassis number or National Livestock Identification System registrations. You cannot use the PPSA for land. Note – the PPSA is commonly and somewhat incorrectly referred to as the PPSR ‘personal property security register’. The PPSR is actually the national database users’ access to see the security registrations.

Directors Guarantee. Is a personal guarantee signed by a company director making them liable for all the company’s debt or commitment should the company not be able to meet its obligations. Directors guarantees are requested for smaller companies or when there are limited assets.

Asset financing. Allows assets like property, machinery, equipment or livestock to be used as security for a loan. Depending on the asset, financiers can loan up to 90% of the asset’s value.

Which type of security is best?

Usually lenders will stipulate which security they wish to take to offset their risk. Usually it’s a direct interest in what they are lending, for example a tractor if they are an equipment business. Their decision will be guided by what gives them the best chance of recovering their debt/investment. Sometimes alternative security can be given to secure a deal, for example livestock or grain contracts. Agfarm Accelerate utilises the PPSA to secure crop input finance. In this example there are two key reasons for using this type of security:

Fit for purpose. Registering a specific security interest in a crop via the PPSR is low cost, quick and relatively easy. Registrations are easily identified and accepted and understood across the grains industry.
Flexibility. Registering an interest specifically in crops doesn’t impact other security interests such as land or machinery. The borrower can continue to leverage those assets as required. Further, registration is easy to remove once the debt is repaid.

 

What is Agfarm Accelerate?

Agfarm Accelerate is a line of credit for all your cropping needs; agchem, fertiliser, seed, irrigation water, land lease payments, crop insurance and fuel. It’s secured against your future summer and winter crop production and repaid after harvest. For more information on Agfarm Accelerate and how it can assist you with your cropping program this season, give one of Agfarm’s Regional Managers a call on the details below.
 
 

Reid Seaby
WA Regional Manager | 0439 625 853

Kate Phillips
SA Regional Manager | 0438 128 472

Anthony Hall
QLD & NSW Regional Manager | 0400 873 777

James Ryssenbeek
VIC Regional Manager | 0447 743 556

 

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Agfarm Finance Newsletter – April – 2019 Agronomy.

This article was co-authored by Agfarm and Michael Camac, Platinum Ag Coorong Branch Manager and Agronomist 

3.5 minute read

2019 Agronomy

We’re well into the 2019 winter cropping window. Following some favourable rains in eastern Australia, but not yet for Western Australia, we’re going to take a look at what the continued dry means for soil health, planting intentions, fertiliser and chemical applications.

Both South Australia (SA) and the east coast of Australia have had a very challenging 12 months, with some of the lowest in-crop rainfall figures in recent history, as well as devastating late frosts. With little starting ground cover, the dry summer and autumn has left much of this land very exposed creating a tenuous situation for primary producers as we move into sowing, from both an agronomic and financial perspective

Agronomics

**The agronomic information below relates primarily to SA. For information specific to your area and circumstances, please contact your local Agronomist.

Large areas of SA soils are sands or sandy loams, hence very light by nature and prone to wind erosion when exposed. Heavier loam or clay loam soils tend to cause dust storms and lose top soil in strong winds which we saw earlier this year. As well as loss of top soil, windy conditions can also exaggerate soil/root disease. This usually affects crops sown on opening rains when there has been little time for ‘disease break period’ before the crop germinates. Modern seed treatments have helped with this scenario.

Other issues affecting farmers for the 2019 plant include:
– Availability of quality seed due to poor production last season
– Herbicide residue due to low soil moisture levels not adequately breaking down herbicides from last season

Many farmers will sow dry this year. Dry sowing can be risky depending on soil types and rain fall after seeding. However, early established crops generally produce the best outcome, so the gamble is often taken. If significant rains are received by mid-May before ground temperatures fall, we have a chance of a reasonable season. If enough rain falls to allow germination but no timely follow up rains occur, seedlings can die without sufficient sub soil moisture to continue the plants root growth. Some soil types require significant rain events to ‘wet up’ appropriately. Heavier clay/loam soils and non-wetting sands can be particularly problematic when dry sowing. There is also a risk of wind/soil erosion after sowing if the seed bed stays dry.

Later seasonal breaks will drive a few key changes, commonly changes in crop rotation and reduced planted area. For example, canola hectares will generally reduce and may get sown to barley if enough seed is available. Lower rainfall areas will often cut back on the total cereal crop area sown and some areas will be sown for livestock grazing or hay only. Late breaks can also influence fertiliser tonnages and applications with decisions being made “on the run” when there is a break or if crop areas need to be reduced or increased. Urea/SOA quantities are then influenced by how the season develops. Crop chemicals (knockdowns, pre-emergents, fungicides etc) required in-program also are affected by late seasonal breaks. All these elements fuel the financial impacts on farmers this season.

Financial

Seasons with rapid changes in grain/hay/livestock prices and a pending break in weather often create opportunities such as increasing the amount of land sown or additional fertiliser applications post sowing. This requires cashflow to enable the purchase of unbudgeted seed, fertiliser, chemical or fuel to keep machinery going. Unfortunately, coming off a poor 2018 season, we know cashflow can be limited to implement these opportunities in a timely fashion. Agfarm offer an input finance program for all your major cropping inputs such as seed, fertilise and agchem. With a fast turn around and simple application, Agfarm Accelerate can allow you to maximise your opportunities as they arise. For more information on Agfarm’s crop input finance, visit www.agfarm.com.au/finance or call your local Regional Manager on the details below.

Reid Seaby
WA Regional Manager | 0439 625 853

Kate Phillips
SA Regional Manager | 0438 128 472

Anthony Hall
QLD & NSW Regional Manager | 0400 873 777

James Ryssenbeek
VIC Regional Manager | 0447 743 556

 

This article was co-authored by Agfarm and Michael Camac, Platinum Ag Coorong Branch Manager and Agronomist 

 

 About Platinum Ag Services

This article was co-written by Michael Camac, Platinum Ag Coorong Branch Manager and Agronomist. Platinum Ag Services has stores in 11 locations across South Australia and Victoria offering a wide range of products including finance, chemical, seed, stock and pet feed, animal health products, tanks, pumps and irrigation equipment, fencing, hardware tools and garden supplies. They have a strong team of agronomists providing you with the right advice to ensure you can maximise the opportunities of your farming enterprise.

For more information on Platinum Ag Services, visit www.platinumagservices.com.au or call (08) 8130 5000.

 

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Agfarm Finance Newsletter – March – Irrigation Water, Options and Future Security Products.

This article was co-authored by James Ryssenbeek, Agfarm Regional Manager VIC and Wendy Bartels, Marketing Manager Ruralco Water www.ruralcowater.com.au

Irrigation Water, Options and Future Security Products.

The irrigation water market is a diverse and sometimes complex beast with endless terminology. Given the regular discussions and appearance of water markets and allocations in the media, we thought it timely, with the help of Ruralco Water Brokers, to give an understanding of basic water market lingo and how farmers can finance their irrigation water this season.

The Lingo

Let’s start with some definitions. (Naturally) Each state and territory have different rules and terminologies, but there are some common themes and generalisations. To keep this simple, we’re going to use the Victorian Murray area as an example.

Entitlement: the maximum megaliters (ML) purchased and allocated to a water user.
Allocation: the per cent of entitlement in ML you can access during the season. This is determined by local water management bodies such as Murray Irrigation Limited. This can be zero.
Security (of supply): most commonly there are three levels of security.
1. High priority: water available to owners before low priority water entitlements.
2. Low priority: water available after high priority allocations have been met.
3. Temporary: water available on any given day purchased on the spot market which must be used during the season it was purchased.
Ownership: water can be owned permanently (over more than one season) or temporarily (for one season only). There are risks and benefits of each. Most irrigators have a portion of both.
Trading: anyone can buy water, and as a generalisation, it can be traded like an ASX share, with the same basic principles of risk/reward regarding movements in price.
Seasonality: the water industry has seasons. The Victorian Murray area is based on the financial year from 1st July to 30th June. At the start of each season, allocations are reset based on water storage levels and inflows.
Carryover: the ability to take a per cent of last season’s unused water into the new season.

Now we have a base, let’s explore some of the ownership, purchasing options and strategies in a little more detail.

Ownership

Permanent Entitlement

Permanent entitlements (entitlement) give water owners certainty of annual entitlement (or access) which reduces the risk of not being able to access water as required. As we said earlier, entitlements vary in reliability and security. Higher reliability entitlements allow users to plan better, and this security is reflected in the purchase costs. The higher the reliability and security, the more expensive the entitlement.

Temporary Allocation (Temp)

Temporary allocations are bought and sold on the spot market. This option allows you to buy precisely your requirements at any point in time, without the capital outlay of purchasing permanent entitlements.
Pricing usually reflects supply and demand. In the current climatic conditions, temporary water costs are unified across the southern basin at $475-485/ML (2nd April) up from mid $200/ML six months prior.

Purchasing Options and Strategies

There are many objectives you need to consider before purchasing water such as trading rules and potential restrictions, carryover opportunities, historical allocations, increase in demand for a particular water source and overall cost to your business.
Below are a sample of options and strategies available to buyers to help manage access, price risk and cashflow.

Forward Allocation (forwards)

Forward allocation contracts allow users to lock in future water prices and certainty while only outlaying a deposit until the water is to be delivered. This can be used for current season water or over multiple seasons.
In the current market, the uncertainty of future allocations as a result of continued dry conditions is causing single season forwards to be more favourable than multiple season strategies.

 

Leasing Entitlements

Entitlement leasing provides irrigators a low(er) cash intensive opportunity to lease some of their allocation requirements from a range of different entitlement security options. As the value of water entitlements has continued to rise, irrigators are looking for alternative methods to secure their water requirements, outside of owning the entitlement themselves.
Leases vary in price based on the entitlement but will typically represent five to six per cent of entitlement value. Leases are frequently offered for three to five years. Be aware, lease entitlements may not mean you’ll get an allocation.

Parking/Carryover

Parking is the ability to rent space from another entitlement owner to carry unused allocation into the next season.
Water entitlements have unique characteristics which can allow you to carry water from one year through to the next. Carryover can be a useful price risk tool against a rising spot market price, but there are obstacles irrigators need to be aware of like trading rules, system losses, potential restrictions, fees, and risk of a spill.
The most common option to carryover or park allocation is to utilise or purchase Victorian low-reliability entitlements. This option provides irrigators with a 100% guarantee of accessing all of their carryover at the beginning of the season.

Inter-valley trade opportunities

The Murray Darling Basin Authority (MDBA) manages the irrigation requirements for states based on the Murray Darling Basin agreement and water sharing plans. Under MDBA rules, water trading is currently permitted in and out of all zones across the southern basin except the Murrumbidgee. The ability to trade water interstate and from zone to zone means more water is available and delivered to where water is required.

Cost of Water Purchases

As mentioned earlier, the price of water fluctuates with supply and demand. The extended drought on the east coast has increased demand for irrigation water significantly, which in turn has caused the price of water to become prohibitive for many when combined with other vital inputs and the per metric tonne return of many commodities. This is illustrated below using wheat and cotton prices as an example.

As a key input for growing a variety of broadacre crops, Agfarm’s crop input finance program can help you manage the costs of executing your irrigation water strategy. For more information on how this works, call your Agfarm Regional Manager on the details below.

 

Reid Seaby WA Regional Manager | 0439 625 853

Kate Phillips SA Regional Manager | 0438 128 472

Anthony Hall QLD & NSW Regional Manager | 0400 873 777

James Ryssenbeek VIC Regional Manager | 0447 743 556

 

This article was co-authored by James Ryssenbeek, Agfarm Regional Manager VIC and Wendy Bartels, Marketing Manager Ruralco Water www.ruralcowater.com.au

 About Ruralco Water Brokers

Ruralco Water has 16 regional branches throughout the southern and northern basins. Ruralco Water’s specialist Water Brokers work with owners and irrigators to identify the best options for your water strategy with the latest water market news. Ruralco Water also offers a 24-hour online trading platform. For more information on Ruralco Water, visit www.ruralcowater.com.au or call Ruralco Water on 1300 007 939.

 

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Agfarm Finance Newsletter – February – What you need to know about crop insurance for 2019

This article was guest authored by Ausure www.ausure.com.au 

Around the grounds – February 2019

The hot, dry weather delayed planning and input purchases throughout February with next to all input suppliers reporting sales well below average for this time of year. On the upside, the lack of rainfall has seen a reduced outlay in cost on chemical given summer weeds have not germinated.

Fertiliser prices are expected to fall or at least not rise in the near term so pre purchasing fertiliser isn’t the top of mind which it quite often is at this time of year.

It would seem the increase in free time has sparked farmers to get their finances organised in hope of an Autumn break to not miss an opportunity when it presents its self.

What you need to know about Crop Insurance for 2019

2019/20 winter cropping plans are a hot topic in broadacre areas at the moment and with the mid-range weather forecast instilling little confidence of a substantial break in weather, many are deciding what to plant, if to plant and what type of insurance they should take out to ensure they’re covered if the BOM is correct in its predictions. With this in mind, we’re going to take a look into different forms of crop insurance available in 2019. The good news is that farmers have more options than ever before to protect crop investments. Some insurance products are simple and easily available, while others are relatively new.

2019 sees a significant drop in the number of companies offering Multi-Peril Crop Insurance (MPCI), with at least three major insurers withdrawing products and those remaining likely to face capacity restrictions. This is largely due to the expense, poor uptake by the farming community and unfavourable claims results over the past four years.

Single Peril weather products have recently been introduced to fill this void. This offers increased flexibility to farmers and agricultural businesses wishing to offset specific risks vital to their own situation. While the concept of covering all perils is certainly desirable, many perils are already being treated by everyday farming techniques; the use of chemicals, fungicides and top up fertilisers. The overwhelming perils affecting yields are lack of rain, frosts, fire and hail.

Fire and hail insurance are still readily available and reasonably priced. This generally leaves two key perils that need to be covered; rain and frost. Often severe frost and drought conditions go hand in hand where the lack of moisture permeates into below zero temperatures. Many family farms can produce their own rain records for 50 plus years. A quick review of these years matching rain against frost events might allow a strong degree of correlation allowing you to pick a point where the single peril cover of rain will give you the broadest cover at the lowest cost per hectare.

A major advantage of the single-peril products is the flexibility in when you take them out and the periods of risk you can cover. Unlike MPCI covers which need to be bound around mid-April, single peril products can be taken out up to 30 days prior to the risk period.

Let’s look at some of the options:

Fire and Hail Insurance

This is commonly available in Australia and generally the cheapest perils to cover.
– Covers your crop for specified perils, usually fire and hail, but also includes some other benefits such as transit insurance (following harvest), some storage cover and damage caused by straying livestock.
– Covers your loss of yield following a loss caused by an insured peril.
– You can insure for an agreed value per tonne.
– You may have to declare an estimated yield and this will be used to calculate the premium, as well as set a ceiling for the maximum amount payable in the event of a claim.
– Some products let you adjust that yield periodically as the crop develops while others allow you to declare the actual crop harvested and calculate your premium accordingly.

Multi-Peril Crop Insurance (MPCI)

MPCI generally covers farmers for the loss of yield and/or farm revenue loss caused by a multitude of insured perils. Peril risks can include lack of rainfall, too much rainfall, frost, heat, wind stress, revenue shortfall and a number of others depending on the product. Hence, premiums can be expensive. In addition, there are set up costs to consider as historical farm financials are generally required. This data might be time consuming for farmers to obtain.

 
Options include:
– Farm income protection
– Agreed minimum yield
– Parametric or weather indexation

Single Peril Weather Insurance

This is a new product suitable for farmers with specific concerns. Currently, it is one of the simplest products to obtain.
– A product is tailored for specific weather events that are important to your farm. You set the parameters (e.g. below average rainfall over a three month period – either the sowing period or prior to harvest). Premiums are calculated according to the parameters set.
– Commonly farmers will want protection against:
    – Lack of rain (specify the period)
    – Frost (specify the period)
    – Too much rain (specify the period)
    – Wind (or cyclone activity)

These products rely on objective, independent, meteorological data so there is no need for loss adjustment or claims negotiation. Revenue reductions or expense enlargements are compensated for within days of contract conclusion.

Protection is tailored to your precise location, exposure and financial requirements. Unlike more commoditised risk transfer policies, weather contracts are bespoke to each farmer’s needs. The only limitations are a third-party data reference provider is used and cover usually needs to be bound at least one month out from the inception date.

Cost of Insurance

A problem many farmers encounter is the cost of insurance. It’s priceless when you need it, but expensive when you don’t. There isn’t really a one size fits all insurance premium as it is heavily tailored to you and your business and sometimes the cover you want is cost prohibitive. Agfarm believe the inclusion of crop insurance is prudent in broadacre farming. For this reason, we have included crop insurance as an approved input that can be paid with Agfarm Accelerate, our input finance program. For more information on Agfarm Accelerate and how it an assist you this season, call your regional manager on the details below.

Which type of insurance is best for your farm or agricultural business?

A locally based insurance broker can help you sort through all the current options available in the marketplace and advise the way forward. For more information and to speak with your local Ausure insurance adviser, Call Michael Cullinan on 0447 528 116 or visit www.ausure.com.au.

This article has been guest authored by Ausure: www.ausure.com.au

 

 
 
 
 

Reid Seaby WA Regional Manager | 0439 625 853

Kate Phillips SA Regional Manager | 0438 128 472

Anthony Hall QLD & NSW Regional Manager | 0400 873 777

James Ryssenbeek VIC Regional Manager | 0447 743 556

 
 
 
 
 

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Agfarm Finance Newsletter – January – Lease vs Buy, The Age Old Argument

Reid Seaby, Agfarm Regional Manager WA

Around the grounds – January 2019

The BOM recently released their quarterly outlook which unfortunately is instilling little confidence in growers, particularly those on the East Coast who have just suffered through a very challenging season. As farmers begin budgets and look towards next season, they are rapidly realising the impact of the poor production year. This is being exaggerated by the outcomes of the banking royal commission. It is reportedly becoming more and more difficult to get funding and there have been significant time delays. Even those who have been eligible to apply for the government assistance loans have commented on the extensive paperwork and lengthy wait periods.

On a more positive note, the expectation of greater compliance and rigour from the industry has prompted growers to be proactive and engage with their financial provider/s earlier than they traditionally would. Another encouraging thing to come out of the elongated dry spell is the reduced need for chemical, with very few people experiencing a summer weed germination.

Lease vs Buy, The Age Old Argument

With famers seeking opportunities to scale up their operations, increase profitability, manage risk and support succession planning, they are forever looking for options to grow their land holdings to accommodate more cropping and more livestock. This has historically been achieved by purchasing land that is for sale but in recent times, leasing has become a more popular and economically viable option.

Leases provide the lessee with the benefit of accessing increased acreage, enabling them to achieve greater economies of scale without having to raise huge amounts of capital for the purchase, while also decreasing the magnitude of the overall commitment. Not only does it benefit the lessee, but it also allows the existing landowner to decrease the size of their operation or exit farming without parting ways with an income generating asset.

More recently, leasing land has become an increasingly popular business model for farmers to either get in to agriculture or to add to existing land holdings. Although the number of leases has increased in Australia it remains an underutilised option when compared with the high lease rates in places such as Canada, the UK and the United States where leasing can account for between 40 – 60% of farmland1.

What are the pros to consider?

1. The ability to expand your business’s output without the large capital outlay. Some farmers are not in a position financially to buy additional land, rather they acquire a lease property to enable them to increase the area of their farming operation. According to the Australian Farmland Values report produced by Rural Bank in 20172, the average annual median price growth for agricultural land was 6.6% over the past 20 years, making it more and more challenging for farmers to buy property. Leasing is a solution to this.

2. Succession – it can provide a transition for older and younger farmers. In some instances, older growers are looking to scale down their farming operation which gives other younger farmers the opportunity to increase the scale at which they operate. This is a common form of succession planning for families.

3. Economies of Scale. Increasing scale should generally mean farmers can achieve greater levels of efficiency because the fixed costs are spread over a larger area of land. Although some overheads will increase, the overall cost of production on a per hectare basis should decrease.

What are the cons to consider?

1. Flexibility of agreements. With leases being a less common form of land tenure, there are many ways agreements are structured, they seldom follow a standardised practice. The flexibility these agreements offer is often beneficial but can also cause a lot of angst amongst the interested parties. Without a properly prepared and formalised lease agreement that details the landowner’s and tenant’s obligations, the outcome has the potential to be messy.

2. Price and term of lease. The price and term of a lease can also be difficult to negotiate. A fair lease price is hard to determine with volatility in grain markets and input prices. Lease terms will often depend on individual circumstances. A longer lease term may not be in the interest of the lessee based on their own future planning, however a shorter lease term can often lead poor soil conservation as tenancies change.

With these pros and cons in mind, Agfarm have introduced lease payments as part of the Accelerate finance package. This means from the 2019/20 season and beyond, growers will be able to fund their lease through Accelerate which will further assist in managing cashflow. To be eligible, the payment must be for land on which the current season crop is grown, a formal and legally binding lease agreement must in place, and the payment will be made from Agfarm to the landowner on the Accelerate customer’s behalf. For further information on lease payments or any Accelerate related questions please contact your local Regional Manager.

1. Is Agriculture Land A Good Investment. Decisions On Farm Land Tenure: Buying, Leasing And The Alternatives. Duncan Ashby (RG Ashby & Co.). 10/3/2016.https://grdc.com.au/resources-and-publications/grdc-update-papers/tab-content/grdc-update-papers/2016/03/is-agricultural-land-a-good-investment
2. Australian Farmland Values 2017. Rural Bank. Published March 2018. Department of Agriculture and Water Resources 2018, Agricultural Lending Data 2016–17, Canberra, October. CC BY 4.0. https://www.ruralbank.com.au/assets/responsive/pdf/publications/afv-2017.pdf
 

Industry Report – Agfarm’s agribusiness reporting pick for the month.

Rural Bank – Weekly Economic Commentary – Why Isn’t the Australian Dollar Rallying More?

 

 

Reid Seaby WA Regional Manager | 0439 625 853

Kate Phillips SA Regional Manager | 0438 128 472

Anthony Hall QLD & NSW Regional Manager | 0400 873 777

James Ryssenbeek VIC Regional Manager | 0447 743 556

 

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Agfarm Finance Newsletter – December

Kate Phillips, Agfarm Regional Manager SA

Around the grounds – December 2018

Well that’s a wrap for harvest 18. The continued wet weather, although a burden to harvest progress during the final few weeks, should lead to good sub soil moisture levels going forward into 2019. With good subsoil moisture comes weeds, thus many growers are out there getting on top of summer spraying to conserve as much of this moisture as possible.

Tightening on Rural Lending

In the last Agfarm Finance Newsletter we touched on alternative funding sources for input costs and cashflow management. We also alluded to the impact the Financial Services Royal Commission tabled by government in September is having on the finance sector. This month we’re going to take a closer look at the early impacts of the Financial Services Royal Commission drawing on industry sources and what it might mean for the agricultural sector, particularly broadacre farming.

Why did the Royal Commission happen? The Interim paper pointed to greed.

“Selling became their focus of attention. Too often it became the sole focus of attention. Products and services multiplied. Banks searched for their ‘share of the customer’s wallet’. From the executive suite to the front line, staff were measured and rewarded by reference to profit and sales” 1

Obviously, financing is a very important part of the Australian agricultural industry. Most farmers aren’t weekly, fortnightly or monthly income earners, and there is a heavy reliance on lending to fund investment and working cashflow requirements prior to selling their produce. ABARES agricultural lending data released in October 2018 found 95% of Australian farms are family owned and operated, with $70.123 billion of agricultural debt spread across 145,656 entities.2 The role of providing working and term debt finance has (and still does) traditionally fallen on commercial banking. However, as a result of the Royal Commission findings, lenders are reviewing their credit procedures and lending/profit making cultures which directly impacts traditional funding arrangements. We’re seeing tighter lending guidelines and lower loan to equity ratios, especially in rural areas; including regions which have ‘strong prospects and those that haven’t been touched by drought’. 3

“Tighter lending criteria the big banks have been putting in place for residential home loan customers have flown through to aspiring buyers of rural properties and acreages”. CEO of agribusiness Elders 3

So what does this all mean

Competitive, flexible alternative lending pathways are more common place today and are forming part of agribusinesses core funding mix. This is especially true of the younger farming demographic who don’t have the loyalty or can’t access ‘traditional banking’ lines of finance.

Younger producers are turning to residential home loans to buy their first farm because financing for agriculture has become too difficult to obtain in Australia. Queensland’s First Start Loan offers young farmers access to alternative funding arrangements. Since 2009, 439 First Start Loan applications have been approved valued at $1,686 million.4

So, while farmers are still using traditional lending avenues, they are now looking at alternative lending pathways for not only property and machinery purchases but for cashflow assistance throughout the year. The previously mentioned ABARES report showed working capital debt accounting for 37 per cent of average broadacre debt at 30th June 2017.2 This demand has seen an increase in alternate funding lines move into the agricultural industry to assist in continued investment and growth.

Over the last 10 years Agfarm has introduced three cashflow tools to help broadacre farmers with the challenges of cashflow management. First it was providing a cash advance on grain transferred into Agfarm Advantage. Then Agfarm introduced Agfarm Accelerate, a line of credit for input finance secured against future crop production. More recently Warehouse Cash was launched which gives users to ability to unlock 60% of the value of warehoused grain in cash.

Given the current scrutiny surrounding the traditional funding lines, it would be safe to speculate there will be more products coming to market to help feed this growing need for farm finance.

1. https://financialservices.royalcommission.gov.au/Documents/interim-report/interim-report-volume-1.pdf
2. Department of Agriculture and Water Resources 2018, Agricultural Lending Data 2016–17, Canberra, October. CC BY 4.0. http://www.agriculture.gov.au/SiteCollectionDocuments/agriculture-food/drought/ag-lending-data-2016-17.pdf
3. Australian Financial Review, Simon Evans 14th Dec 2018
4. Australian Dairy Farmer “Young Farmers take on home loans” Matthew Cranson 2014

 

Industry Report – Agfarm’s agribusiness reporting pick for the month.

Australian Government – Department of Agriculture and Water Resources – Agricultural Lending Data

 

 

Reid Seaby WA Regional Manager | 0439 625 853

Kate Phillips SA Regional Manager | 0438 128 472

Anthony Hall QLD & NSW Regional Manager | 0400 873 777

James Ryssenbeek VIC Regional Manager | 0447 743 556

 

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Agfarm Finance Newsletter – November

Anthony Hall, Agfarm Regional Manager NSW & QLD

Around the grounds – November 2018

Headers were rolling for the month of November and so too were the summer storms. Weather has been hampering any good solid runs nationally with scattered small and large falls. We’ve not heard reports of downgrades, but there is definitely a green tinge appearing, so we expect summer spraying will commence soon. The rain has been positive for sorghum, corn and cotton planting opportunities for those in summer cropping areas.

Harvest would be around 60% done nationally. East coast quality has been good with high protein hard wheat, low screening and good test weights. There has even been a good level of malt barley. Western Australia harvest figures keep increasing, but lower protein ASW makes up more than 50% which is good for the east coast feed rations!

2018/19 winter cropping spend has completely wrapped up for the year. Interestingly, we’re seeing increased enquiry for alternative funding lines for next season’s input costs. Did someone say Royal Commission?

Cashflow Management

Despite record prices, income is generally below average as a result of reduced yields, and many growers are making cashflow decisions now to manage their requirements for the coming season. With that in mind, we thought it timely to look at ways to repay current funding lines while preparing yourself for next season and keeping the cashflow flowing.

“Whenever you’re making an important decision, first ask if it gets you closer to your goals or farther away. If the answer is closer, pull the trigger. If it’s farther away, make a different choice. Conscious choice making is a critical step in making your dreams a reality.”
– Jillian Michaels

1. Sell to Settle

The most obvious way to meet your current debt or cashflow requirement, seasonal or term debt or harvest costs is to sell for cash. Payment terms have never been faster with two, five, seven and 14 day payment terms common.

There are also numerous smart sales platforms and apps which give great buyer and price transparency, and allow you to transact immediately using only your fingertips.

Right now, 2018/19 grain prices across all port zones have wheat and barley selling at decile 9.80 (out of 10). In other words, for the last 10 years, 98% of the time prices have been lower than they are today!

But what if you want to spread your cashflow and grain marketing exposure?

2. Carry for Cashflow

Carrying grain and selling it over time is the most common way to spread cashflow and give you longer exposure to the market. Speaking generally, there are two ways to achieve this goal: store the grain onfarm or warehouse the grain with your bulk handler and sell over time, or enter a long-term sales program offered by a grain marketing company. Commonly these are called a “pool”.

If you store the grain on farm or in the BHC, you’ll need to manage your cashflow requirements by selling the grain as required.

If you deliver your grain to a medium to long term grain marketing product, like Agfarm Advantage, the grain company will manage the sales on your behalf over an agreed time. In addition, these programs will usually provide advanced, monthly and deferred (post June 30) payment options.

A third lessor know option offered by Agfarm is Warehouse Cash. Warehouse Cash is an inventory finance program which allows you to access 60% of the value of your warehoused grain immediately for cashflow, while giving you up to six months to sell the physical grain. This gives you the benefits of cashflow and market exposure over time.

An important difference between selling to settle and carrying is costs. The longer you hold the grain the greater the cost. These costs might be outweighed by a rising market, the simplicity of monthly payment or potential tax benefits of deferred payment. But the costs will be higher than cash at harvest. Also, don’t forget ongoing bank facility interest.

Below is a guide of some of these costs.
Note: numbers are ex GST, for example purposes only and do not represent specific grains, storage sites or funding lines

 
 
 
 
 
 
 
 
 
 
Always remember you don’t need to commit 100% of you crop to either option. Take a mix and spread your risk.

Funding for inputs

Another option to preserve cashflow during the year is to utilise a short term or seasonal finance facility like Agfarm Accelerate to pay for crop inputs such as seed, agchem, fertiliser or water costs.

Crop input or seasonal finance facilities come in several flavours, but their common goal is to allow the user to purchase cropping inputs as required during the season and pay the bill post-harvest from crop sales proceeds. Cashflow management is achieved by the user deferring the input payments.

Using a combination of competitively priced input and overdraft finance can allow users to remove other higher funding costs from their business like credit cards for example.

Industry Report – Agfarm’s agribusiness reporting top pick for the month.

RaboBank AgriBusiness Monthly

 

 

Reid Seaby WA Regional Manager | 0439 625 853

Kate Phillips SA Regional Manager | 0438 128 472

Anthony Hall QLD & NSW Regional Manager | 0400 873 777

James Ryssenbeek VIC Regional Manager | 0447 743 556

 

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