Weath­er­ing an eco­nomic down­turn

The Tribune (NZ) - - COMMENT - DAVE GAYNOR THE HOW MAN

‘‘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.

PHOTO: FAIRFAX NZ

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.

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