Is drought biting bush businesses more than farms?

Regional agribusinesses hurting as farm cash dries up


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On top of drought, agribusinesses face tougher financial sector pressures likely to emerge

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While national attention centres on the struggle facing eastern Australian farmers with parched paddocks and hungry livestock, regional businesses potentially face even bigger hurdles to survive the big dry.

As farm earnings dry up so, too, have sales and work contracts for many farm supplies and services providers.

Although robust farm commodity prices have helped soften the drought’s blow to farm sector cash flows, regional businesses are feeling the pinch harder than they have for many years.

Southern Queensland lawyer, Damian Bell, suspected many income-squeezed off-farm businesses were on a collision course to even tougher challenges with their banks than their farmer customers.

“I know of well-established retailers in NSW who believe these are the worst trading conditions they’ve ever experienced – sales just dried up,” said Mr Bell, a partner with Toowoomba-based legal firm, Creevey Russell.

Also hurting was the farm support sector which normally provided everything from agronomy advice to spraying, harvesting, fencing, earthworks or seed grading services to farmers.

Just about everybody in the farm services sector is already likely to be feeling some resistance when it comes to borrowing funds - Damian Bell, Creevey Russell Lawyers

He said agribusiness contractors, retailers and farmers alike should be extra alert to financial sector pressures likely to emerge in coming months.

While banks were “highly developed at sounding like they understand customer problems” they, too, were under more pressure, specifically to avoid a blowout in credit use, problem loans and to keep repayments flowing in.

Importantly, farm service businesses did not have the farm debt mediation options widely available to primary producers facing loan stress in difficult times.

Nor could they fall back on facilities such as farm management deposits (FMD) which gave farmers options to park surplus funds in good years at reduced tax rates, then use the money to carry the enterprise in tough seasons, or to help producers fund post-drought restocking or equipment upgrades.

“Just about everybody in the farm services sector is already likely to be feeling some resistance when it comes to borrowing funds,” Mr Bell said.

Lending pressure

Machinery leases and overdrafts were obvious areas where family-sized businesses needed to be wary.

“Don’t expect to extend your current two- or three-year lease loan with the same rollover arrangements you may normally negotiate,” he said.

Damian Bell

Damian Bell

“Your lender isn’t obliged to extend credit on outstanding residual payments into a new loan term.

“Keep a dialogue with your bank – don’t assume your borrowings won’t become a problem for you, or your bank, if you lie low and avoid talking about it.”

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He also warned agribusinesses to be alert to banks referring to terms such as “lending services”, “asset management” or “recovery”.

“Buzzwords like those coming from your relationship manager mean you should take things very seriously,” said Mr Bell, whose firm’s client base from western Queensland to the Murray River is 75pc agriculturally-related.

“Banks have watch lists for customers they think may come under stress, customers breaching their lending terms, and another list of clients they want to ‘exit’.

Agribusiness people accept dry times are part of their business cycle - Grant Cairns, Commonwealth Bank

However, Commonwealth Bank of Australia said it fully appreciated many regional businesses may be just as vulnerable to seasonal cycles as farmers.

CBA had subsequently extended many of its drought assistance offers, including debt repayment holidays, to cover the farm service sector.

“Admittedly these businesses don’t have FMDs to fall back on,” said agribusiness banking boss, Grant Cairns.

“But we make sure we have dedicated bankers to engage with them, understand their position and work with them on business reviews at least once a year.

Varied seasons, business needs

“Agribusiness is a diverse area and we’re careful not to make blanket policies.”

He said seasonal conditions varied across Australia, and so were individual business needs.

“I also get the feeling agribusiness people accept dry times are part of their business cycle,” Mr Cairns said.

“They know it will rain again and they’ll get very busy.”

Agribusiness Australia executive officer, Tim Burrow, agreed – when the drought broke farmers would need fertiliser, fuel, and equipment and would have cash to spend.

“I’m not hearing a lot of comment about how bad the business climate is, although clearly many agribusinesses are experiencing challenging times and are revising their expectations,” he said.

“Public companies like Nufarm, Ruralco and Elders have made it clear their sales forecasts have taken a hit, but in general the industry expects to work its way through this.”

Healthier than six years ago

ANZ agribusiness head Mark Bennett also noted considerable resilience in farm and farm-related businesses, helped by some top production years.

“In most respects the farming industry looks better now than six or seven years ago,” he said.

“It will be tough for many at the moment, but a wide section of sector has banked a run of positive seasons and prices of late.

“If you’re a harvest contractor your capacity to pay will now be reduced, but we are conscious of those fundamentals.

“We also believe our drought relief package initiatives for farmers will help keep cash flowing through to the wider ag industry.”

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The story Is drought biting bush businesses more than farms? first appeared on Farm Online.

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