Increasingly volatile markets may mean farming businesses that are highly seasonal or have long profit cycles will need to think differently about managing their cashflow in the future is the message from Robert Taylor at CKD Galbraith who says farmers are having to operate in very different conditions than they were 10 years ago.
"This greater level of volatility in agricultural markets is going to be normal," says Robert Taylor. "Farm businesses whose profits come in on a seasonal, annual or even longer-term basis are facing a greater risk of hitting markets at sub-optimal times. While better market highs' could well balance out profits in the longer term, some businesses may end up waiting two or three business cycles to see returns come through." He explains that in Scotland this could affect farms operating in many sectors but especially those with seasonal produce such as beef, lamb and cereals. The delay in 2015 subsidy payments to farmers affected the whole industry and will continue to have repercussions into next year. "Many of these could end up funding increasing amounts of their working capital through 12-month annual overdrafts, which simply can't provide the longer term certainty and financial buffer' needed. Instead, shorter term cashflow needs would be better covered via a flexible loan spanning several years rather than an annual overdraft, which could find markets largely unrecovered in a 12-month period," he explains.
Another measure to ease cashflow pressure could be to take out longer term or interest-only loans says Robert Taylor
We find our clients can be inclined to pay off term loan borrowing as quickly as possible. But at current interest rates, taking a longer term loan with lower monthly charges could be a very practical step to take to reduce the cash flow cost. Equally, a number of lenders offer interest-only loans where you pay back the capital when funds allow.
So borrowing 250,000 over 30 years rather than 20, or even borrowing on an interest-only basis would keep monthly repayments low especially with the rates you can fix now. In difficult times, like now, this means you are putting your business cashflow and yourself under less pressure. In more profitable years, it means you can free up cash to invest elsewhere or pay off more of the loan capital.
He says the example of 250,000 borrowed at a notional 4.5% interest rate on a 20-year annuity would mean a representative monthly repayment of 1,582. As a 30-year annuity it would represent a repayment of 1,267 per month; and on an interest-only basis, 938 per month.
"As ever, it's important to talk through these options with an independent financial adviser before making any decisions," adds Mr Taylor.