It’s Victoria’s turn to be on the right side of the seasons. We can empathise with those suffering dry conditions and we wish them a better season for 2020, however if 2019 is profitable for you then what should you be planning?
The last ORM newsletter talked about using the good years to build financial buffers, but should we also be looking for opportunities to diversify and expand?
Expanding by purchasing land in regions under long term drought would be a gutsy move, but is that the opportunity? The answer lies in your view of short term versus long term seasonal volatility.
As farmers we understand fluctuating seasons. Areas currently in drought are in the middle of uncertainty and will be utilising their financial buffers to get through. Is purchasing land in areas with discounted land values callous or is this a way to help? Maybe some owners in drought affected areas will be pleased to have a buyer so they can exit and move on.
If your debt to land asset ratio (security) is strong, then there’s a capacity to borrow and leverage existing assets to grow. And if recent profits are strong (Return on Capital greater than 4%) then a good case can be put, to expand through purchase of additional assets. If additional farmland fits your agreed family goals then let’s explore opportunities. Alternatively, investing off-farm to support succession planning may be your preference. For those looking to invest, on-farm versus off-farm is an interesting comparison and may surprise some when considering their next investments.
Equity growth can happen passively through capital growth in asset values, but if your goal is to ‘be ahead of the pack’ then making investment decisions to leverage your surplus equity will be something to explore.
1. Machinery finance in the 3% range can be utilised to fix low interest rates for 5 years.
2. New season grain prices are moving upwards, reflecting seasonal uncertainty.
3. As the dry converts some grain crops into hay, hay prices are dropping when compared to the excellent prices of 2019.
4. Before cutting grain crops for hay, do the comparison using realistic prices for hay.