Prof Johan Willemse, agricultural economist, photo credit: erhui1979 Getty Images/Fortune
It is evident that the economy is in a deep recession and most economists project that the economy will shrink by at least 10% in 2020. Unemployment will increase towards 35%. Food demand and meat demand will also be affected negatively, as consumers adjust their buying habits to adjust to lower income.
This is a worldwide trend and agricultural economists at Purdue University in the USA compiled guidelines for USA farmers during an economic downturn that I adapted for our local situation. Unfortunately, there is no magic solution during bad economic times.
It is important to keep your focus on your goal and to keep the business going. Also understand that risks have increased and that our Government’s idea of a “growth” policy, add further risks to businesses. Identify the risks that you can manage and try and hedge against them.
The most important action is to protect your cash and manage your cash flow very well. Cash is king and banks are not interested in assets, as assets do not pay loans. Recalculate your cash flow for the next 18 months, identify periods of shortfall and organise now for standby loans for those periods. Banks tell me that farmers wait too long to go to their banks for assistance. It is then very difficult to assist.
• Debt reduction/reserves
Financiers get scared easily. Therefore organise for the rescheduling of debt payments beforehand. Also organise standby credit facilities as a buffer before you need it. It is also a good idea to create an emergency reserve, even now by selling unused and unproductive assets in advance.
• Re-negotiate loans and terms
Interest rates are currently on the lowest level in more than 40 years. This is an ideal opportunity to renegotiate interest rates on existing loans and even to extent the payment term. Your farm’s repayment ability improves with the lower interest rate structure currently in place. Financiers and suppliers do not always automatically lower interest rates on loans when the Reserve Bank lowers rates. Make sure that you get the benefit.
• Stretch cashflow-only pay interest
The last thing a bank or financier want is to repossess an asset or to sell it on an auction. So, when you identify periods of cash flow problems, negotiate beforehand that you will only pay interest and that capital will be repaid when the economy improves. Remember the idea is to improve your own cash flow during this extraordinary tough economic time. This is the deepest economic downturn since the 1930’s and you need to do whatever it takes to keep your business going for the inevitable upturn.
• Collect income quicker
Where possible, make sure that you get paid on time for your product and even ask for quicker payments. Be careful in these times that your buyer does not stretch your payments. This will shift his or her cash flow problem to you and the risk that you can end up with the bad debt, could be real. Just think of the large corporates that need to raise extra cash now and some even closing down. Where possible, stretch the payment to your own suppliers, but be careful not to fall behind.
• Control costs and family expenses
This is a good time to cut costs and re-evaluate your expenses. We all have pet projects that are cash eaters. It is time to get rid of them. Also, re-look your family expenses. In the USA it was found that farmers’ own expenses slowly increases and that they need to be watched.
• Take difficult decisions, but do not endanger future growth
This is the time to take difficult decisions to protect your cash flow and your business. However, make sure that whatever you do, you keep investing in new, cost saving technologies and do not endanger future business growth.