Weathering an economic downturn
‘‘What do I do now?’’ I hear this from panicked business-owners when they have lost a major customer or been hit by a market recession.
Change is normal in business. When the Government changed the rules and Todd Motors closed in 1998, many suppliers lost their only customer. They had to retrench, diversify if they could, and start again. Many folded, losing their businesses, homes and livelihood.
The global financial crisis and loan-to-value ratio (LVR) restrictions, created eight tough years for real estate agents when house sales suddenly dried up. Many agents left the industry while others tightened their belts and held on until the market recovered.
Dairy farmers are no different from any other business. Sometimes the going gets tough because the market goes backwards. This is particularly true of commodity farming. When demand exceeds supply, prices go up encouraging more production which inevitably leads to oversupply and a price slump.
This has been happening for centuries. In 1637, tulip mania gripped Holland and the price of tulips went through the roof due to speculators looking for a quick return. The same happened to the New Zealand goat industry in 1987. In both cases, the boom was followed by a bust with many losing everything.
So dairy farmers – pay attention to history – what goes up, must come down. The steeper the rise – the steeper the fall. When the going is good, put money to one side for when the market crashes.
‘‘What do I do now?’’ Start by guessing the pay-out for the next 2-3 years. No one knows what it will be so I recommend being very conservative. Your degree of pessimism will depend on how risk averse you are. Poker players use their skill to bluff a win. You can’t bluff the dairy market.
Using your price prediction, develop a budget with, in very simple terms, the cash coming in exceeding the cash going out. You may have to sell stock, feed grass, cut labour, reduce maintenance
Start by guessing the pay-out for the next 2-3 years. I recommend being very conservative.
and sell assets to reduce debt. The armchair owner may have to go back to milking and his/her partner get a job to put food on the table. Making hard decisions now will help you get through.
With these measures in place, meet with the bank to see how they can help. Banks are keen for you to get through. If you go in well-prepared you will have a better chance of getting their support. However they will only go so far. Remember they own your farm and, to some extent, they own you.
Any commodity business can fail in a market recession, particularly if the owners/ managers don’t put enough aside during the good times.
All businesses, especially commodity-based ones, need to keep an eye on their markets and to have something put aside to weather the inevitable sudden downward lurches.