Learn how you can protect your farm or agribusiness
In this blog, I’m sharing my thoughts about mitigating the financial risks in agriculture. Learn how you can protect your farm or agribusiness from these inevitable financial risks.
Effective financial risk management is crucial to ensuring the stability and growth of agribusiness operations. Here, we expand on the key mitigation measures: maintaining a strong credit profile, diversifying income sources and having contingency funds.
Understanding the impact of financial risks in agriculture on your business
I probably don’t need to tell you that your business faces many financial risks. On their own, some of these risks might seem manageable.
But it’s often when you pile up several risks that things might feel a little challenging. It’s a bit like dealing with a leaky bucket. You’ve got your hands full plugging one hole up, only to have a leak spring up on the other side of the budget.
There is no way to remove every risk from your business (apart from shutting up shop all together). And while you might be tempted to act like an ostrich and jam your head in the sand and cross your fingers and toes, that’s not exactly a solid (or recommended) business strategy.
The key to mitigating financial risks in agriculture is to understand the risk, what the risk looks like, how it could affect your business, and how you can mitigate it.
Availability of credit
One of the most challenging risks to manage is access to credit, which is often linked to other risks like market volatility (locally and overseas) and unexpected weather events. Ensuring you have the right plans and structure (and advisors) in place can help you access credit when you need it.
Interest rate instability
After many years of relatively low interest rates, recent years have seen rate rise after rate rise. This is great if you’ve got funds invested and you can utilise the additional interest. But in most cases, it means your loan repayments keep rising. Hopefully, you planned for this when you took out the loan, ensuring you could keep making repayments when rates (inevitably) increased. But if you didn’t, the struggle to make the additional payments could be an enormous risk to the financial wellbeing of your farm or agribusiness.
Unpredictability of farming
While many businesses face uncertainty, farming and agribusiness have a level of unpredictability that is difficult to control, thanks to the weather. Sure, we may have long range weather forecasts, but how often are they correct. But freak weather events such as storms and frost can knock out a crop in a few hours.
Market volatility
It’s one thing to deal with the uncertainty of the conditions on your own farm. But the reality is, things happen well outside your farm gate which can affect your farm business. From overseas weather events to wars and political changes, to changes in market access policies and changing biosecurity measures.
Mitigating financial risks in agriculture
But it’s not all bad news. As challenging as the risks are, there are ways to counter those risks, which I’ll cover in this section.
Diversify your farm business income
Diversifying your income sources is critical to mitigate financial risks. By spreading income streams across various income activities, you reduce your dependency on a single source.
Key approaches include:
- Producing a variety crops spreads risk and enables you to take advantage of different This also helps manage soil health and reduces pest and disease risks.
- Contracting can assist with providing an extra income utilising machinery that you already own.
- Processing value-added products convert raw products into higher-value items.
- Finding off-farm employment or entrepreneurial activities can provide income when agricultural production is low, especially during off-seasons or when harvests are poor.
- Developing farm tourism and services such as farm stays, tours and educational programs to generate additional income and promote community engagement.
Set up a contingency fund
One of the best ways to manage unexpected financial challenges is having funds you can access in times of emergency. Whether you need additional cash to cover unexpected expenses, having access to your own cash reserves can reduce financial and mental stress.
Strategies to build and maintain a contingency fund include:
- Set aside a percentage of your profits during good years to build a robust financial buffer you can access in tough years.
- Hold some assets as cash or other liquid assets to address immediate needs without disrupting operations.
- Regularly assess potential risks and size of your contingency fund based on measurements and the nature of your business.
- Maintain adequate insurance to cover specific risks so you can use your contingency funds for risks that you can’t insure against.
- Establish a line of credit so you have access to funds without needing to liquidate assets (but make sure you set yourself some strict guidelines on what makes up an emergency).
Maintain a strong credit profile
Having a strong credit profile means you can access funding or capital on good terms when you need it. Maintaining your credit profile includes:
- Repaying your debts on time – by paying on time, you’re building a positive credit history. Late payments affect your credit score, which makes it harder to access to future borrowing.
- Keeping accurate financial records to show lenders your business is financially stable. Having complete, up-to-date records allows you to be transparent and build trust with financial institutions.
- Balancing the use of debt and equity, which is referred to as leverage, to manage risk. If you’re over-leveraged, you may suffer financial strain. Under-leverage can stop you from making the most of growth opportunities.
- Regularly reviewing credit reports to address any discrepancies or issues to prevent problems that might come from a negative report.
Interest rates
Managing interest rate risk involves various strategies to protect against the adverse effects of fluctuating interest rates. By effectively managing interest rate risks, you can maintain financial stability, optimise borrowing costs, and achieve more predictable outcomes despite market volatility.
- Fixed-Rate Loans and Investments: Locking in a fixed interest rate on loans or investments provides stability and predictability, protecting you against the risk of rising interest rates.
- Interest Rate Swaps: Engaging in interest rate swaps, where two parties exchange interest rate payments (e.g., fixed for floating or vice versa), helps hedge against interest rate fluctuations and manage cash flow exposure.
- Caps and Floors: Using financial instruments that set upper (caps) or lower (floors) limits on interest rates provides protection against extreme rate movements.
- Interest Rate Futures and Options: Utilising futures and options contracts allows you to hedge against anticipated changes in interest rates and mitigate potential adverse impacts.
- Diversification of Debt Instruments: Spreading debt across various instruments with different maturities and interest rate structures can help balance the risk, ensuring not all debt is affected by interest rate changes simultaneously.
The importance of trusted advisors
Looking at the financial risks to your agribusiness, you might feel overwhelmed. You’re busy enough running your farm, but trying to stay across these elements might seem more than you can handle.
It’s one reason every business needs trusted advisors to work with throughout the year. Rather than just speaking to your accountant at tax time, or your bank or broker when you need to refinance, make a point of staying in regular contact.
It’s just another reason that having an agribusiness broker like me in your corner makes good sense. Part of my job is staying across the financial risks in agriculture that my clients may face. That means you can focus on doing what you do best – running a profitable and successful farm or agribusiness.
Over to you
How do you feel about the financial risks facing your farm or agribusiness?
If you’d like support to understand how your business can face financial risks, please get in touch.
If you have any comments and questions, please send me an email or message me via social media. And if you know someone that could benefit from this blog, please share it with them.