Risk Management

Farmers should make an effort to understand how the country’s financial troubles affect them, and then implement a strategy to mitigate the impact of these challenges.

Before and after Finance Minister Tito Mboweni’s Medium-Term Budget Policy Statement delivered in Parliament in October, South Africans were bombarded with frightening concepts such as ‘currency devaluation’, ‘sovereign credit downgrades’, ‘poor investor confidence’ and ‘capital outflows’.

To help the reader make sense of these financial and economic terms, here are some basic definitions, as they apply to South Africa:

• Currency devaluation

This means that, in a global sense, the value of the rand is decreasing.

• Sovereign credit downgrades

This indicates that investors worldwide see South Africa as becoming an increasingly risky client to lend money to (or invest money in, for that matter), due to the high government debt level.

• Investor confidence

Foreign and local investors don’t want to invest their capital in South African business opportunities as they expect too low a rate of return compared with the risk posed by investing.

• Capital outflows

Local money is leaving the country.

In the economic environment, none of the above bode well, and it would be easy to understand why, normally, rational people start researching the price of property in far-flung countries. But there is another way of looking at things.

PRAGMATISM

A previous winner of the National Farmer of the Year award, Rossouw Cilliers, farms in the Ceres area. Despite political interference within agriculture, he has always contended that every curved ball thrown at him holds great opportunity too.

This sort of pragmatism can be very valuable in these times. We cannot underestimate the risks involved, specifically for the agriculture sector, when faced with economic realities, but they can also be seen as a wake-up call. Now is the time, perhaps, to re-evaluate your business and your ability to deal with threats in an agile manner.

Farmers should have a strategy for dealing with national economic risks and the effect they will have on individual businesses. For example, the threat of further currency devaluation implies that imported farm inputs will become more expensive. The business therefore has to look at ways to mitigate this potential cost increase.

At the same time, currency devaluation poses an opportunity for farmers who export produce. They should earn more rands for every dollar’s worth of goods sold, but only if they contracted wisely.

Sovereign credit downgrades may result in everybody having to pay more when borrowing money. If your business relies on access to a large amount of credit, you may need to re-evaluate your strategy and see if there is a way to build up more capital.

Alternatively, you can consider bringing in partners who will allow you to increase the share of owner’s equity for the financing of operations and business expansion. Unfortunately, poor investor confidence may deter potential partners and make finding them more difficult.

RISK MANAGEMENT

In order to manage these challenges, focus on the following in particular:

• Evaluate the financial position of your business honestly and ensure that you fully understand your own situation;

• Farm with nature; it’s too expensive to fight it;

• Manage your cash flow diligently. There is no value in being flush with assets if it lands you in a situation where you have no money to buy bread, replace a pump or pay school fees; • Review your capital equipment values and insured values, as these could be severely affected by currency fluctuation;

• Do not over-gear your business. Debt is not your friend;

• If exporting, fix contracts in the foreign currency;

• When importing, fix contracts in rand and allow for the fact that the value of the currency may fluctuate.

Amid the turmoil and curved balls there are always opportunities, but you need to be in a position to swing at that ball and not be lying flat with your face in the mud.