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Finance Notes March 2011

Increasing input costs
Many farmers are alarmed at escalating input costs - prices for inputs like feed, fertiliser and fuel have all increased significantly in recent months.  Unfortunately, as many of these prices are linked to world oil prices – which again is increasing - the outlook is that input prices will continue to inflate.   Faced with this prospect, you need to look carefully at your investment decisions so your business will become less dependent on externally sourced inputs.  Here are a few suggestions to consider:
  • Invest in the land.  Although it might seem obvious, for most farms in Northern Ireland, increasing the productivity of land will reduce dependence on externally sourced inputs.  Spend a couple of hours walking your farm and consider how you can make your land more productive.  Consider if remedial drainage is required, if soil needs to be aerated or lime added.
  • Invest in grass genetics.  While many livestock farmers have invested in animal genetics, some have neglected to invest in grass genetics.  In Northern Ireland we have developed excellent high yielding grass varieties that will produce quality forage and reduce the need to use externally sourced feeds.   
  • Invest in accurate feeding technology. With purchased feed being so expensive it is important that it is targeted at animals which will give an economic response to feed.  For each of your enterprises review your feeding setup and consider if it is worth investing in new equipment to make better use of this costly resource.
  • Invest in energy saving technology.  With increasing energy costs it is important to invest in technology that will help you reduce the energy demands of your business.  
Borrowing
Compared to many other parts of the economy, food production is proving much more resilient in the current economic downturn.  This positive outlook, coupled with the stability of agriculture land prices, makes the sector a relatively attractive lending proposition.  Farmers with well thought out business plans can therefore approach lenders with some confidence.  However, if you want to get a good deal, it pays to do some preparation in advance of negotiations with lenders:
  • Get your accountant to prepare an up-to-date annual account.
  • Benchmark your business to show how your business is performing against similar business.  Contact me if you would like to be part of the Benchmarking at CAFRE programme.
  • If you are changing your system get a cash-flow prepared for the next 12 months.  This will help you determine peak borrowing requirement.
  • Allow time to ‘shop around’ for finance – if you have a well thought out business proposition you will be in a position to negotiate terms. To help you compare loans, lenders are required to quote your interest on a loan as an Annual Percentage Rate (APR).
  • Make sure your borrowing is properly structured. In general an overdraft facility should be used for working capital.  Other longer term investments for land, buildings or machinery can be financed over a longer term that does not exceed the lifespan of the asset.  Remember the longer the period of loan the more it will cost you.  For example, a £50,000 loan at a fixed interest rate of six percent will mean you repay a total of £68,000 over 10 years; however if you change the period of the loan to 15 years you will repay a total of  £77,250.
Make a will
The Law Society reports that one in three people die without a will. For people who die without a will, the state will apply a set formula for the division of the estate.  This formula may not produce a solution which is in the best interests of either the farming or non farming family members.  Although it can be a difficult thing to do, it is worth taking the time to get advice from your accountant and solicitor on making a will.  Don’t forget to review it on a regular basis to take account of changing circumstances.
Making a Will makes good business sense
Making a Will makes good business sense