With the COVID-19 crisis affecting closures of many non essential businesses, we chatted to Brett Bennett from FARMit last week about the impact this may have on the NZ Agriculture sector.
New Zealanders, as a nation, have to eat. So what steps are Brett’s agri clients taking to ensure the safe and effective production of food for the nation? Read on to find out.
How have your agri clients been affected by New Zealand being moved to Alert Level 4 due to COVID-19?
Most of our client base is considered essential services - either in supplying milk or meat and horticulture. Don't get me wrong they're still going to be affected and there is a long road to unravel yet, but we’re immediately working through required farm compliance and self isolation distancing issues now. Some of the key requirements is making sure that anyone with more than 5 staff or in horticulture is registered with MPI. We are working through our client base making sure they are covered. Everyone has to have a plan on how they are going to self isolate and make sure employees know how they’re expected to work through this.
We do have some clients for example contractors that are impacted. The daily developments where maize is coming off, which is fine as they are an essential service, but then the likes of putting grass seed back in where the maize has been (for winter feed), we realise farmers need them too—so it’s about working through those logistical measures. Then there are others who may have fencing contractors who, for example, are not considered essential services or those who employ fencers full time and live off farm. How will they be accommodated as part of the lockdown? Clients with overseas workers have also been impacted particularly as winter approaches and leave normally taken. The ability for them to return home and when, is now uncertain.
The majority of our client base is able to continue on, albeit with extra compliance and testing measures. The day by day approach to new requirements is unsettling for the industry, however we are just working through with those to make sure they meet those compliance factors. Its fair to say the immediate work needs are non financial but this will move quickly within days to understanding the financial impacts..
What other risks do you anticipate in the NZ agri industry?
We should all work on the basis that we will all be impacted financially in some way. Supply chains and ability to move product is very important and having people to process, particularly in the meat sector will have its challenges given the usually close working spaces. Local trade and space and waiting times in abattoirs will need patience and good communication by all parties particularly as we head into winter and with feed shortages experienced in drought regions. If these aren't addressed, feed shortgages and prices could be impacted.
Given the magnitude of the pandemic, NZ dairy companies have moved very quickly to enact their business continuity plans. If our trading partners can manage their logistical risks and keep moving products through (as people need to eat), the risk of price slumps will hopefully ease. The last global dairy auction trade prices were forecast by economists to drop 10%, whereas they only dropped around 5% and so we saw that as a positive considering other markets. Nevertheless farmers need to watch their spending particularly if they are embarking on any major projects.
The kiwifruit sector also isn't without its risks, particularly as the sector is expanding rapidly and also in the early phase of picking, but is pleasing to see early shipments reaching their markets. Profit guidance from Zespri has resulted in a wide value range for SunGold and Green indicating its early days so be conservative in profit estimates.
Those significantly impacted are the beef traders with prices dropping under last year's prices. The back logs on cattle needing to be slaughtered have eased in the North Island but have posed a real problem for those in the South Island. As we approach winter the expectation to have moved cattle off farms earlier to build feed covers for some farmers hasn't happened. So there'll be decisions that need to be made shortly about how they are going to deal with that. The same goes for cull cows for dairy farmers, with the need to get them off the dairy platform and not eating feed reserves kept for milk producing cows and or winter feed. It is extremely important that those production line employees feel safe in their jobs but also the importance they place in keeping these production lines going.
Forestry has been severely impacted as it is deemed a non essential service. The sector has had a volatile 18 months but the COVID announcement has stopped the sector in its tracks. This has made revenue predictions and interruptions for contractors unbearable. If forestry income only forms part of a client's business then the choices and prices per tonne depending on age and yield need to be assessed and appropriate decisions made from there depending on the risk profile or need for the cash at the time.
All in all, we hope the impacts that have been experienced particularly in the last 2-4 weeks can be collectively worked through along with the new government initiatives allowing those to work safely can keep the industry going. The rural philosophy of keep calm and carry on is certainly ringing true.
What about closures of restaurants affecting the local market trade?
Local sale yards are not operating during the lockdown period. We as a nation have to eat, and there will be farmers who run to a local market trading plan that will be impacted as those markets have dried up. This product is likely to be channelled back through the supermarkets I would suggest for the domestic market. However a lot of our NZ product is usually exported. With beef exports to China seemingly improving this might assist in getting throughput going and creating more demand and hopefully prices too.
What would be your advice on the low OCR and lower interest rates on lending by banks?
You know how the saying goes - in times of adversity comes opportunity.
However, this pandemic is also unprecedented. This is a recession caused by a pandemic. With the low OCR and interest rate environment: if people are on a floating rate and there's the ability to minimise any outgoings, then that’s the focus we’ve got for people first and foremost. It’s about always trying to create a resilient business. The lower cost of production you have, the more resilient your business is, ultimately.
I think because of the unprecedented nature and uncertainty that surrounds this it’s less about: “is now the time to have a crack at the neighbours?” or, “is now the time to buy that run off?” My focus is that if you're used to having a higher interest rate and if you're used to paying more, you should be trying to slide that back and continue to make sure you have a resilient balance sheet. My views are that those who are highly leveraged have no better opportunity to use those extra resources to pay down debt and get themselves into a more sustainable position.
In saying that, some of the bigger businesses may look to take this take or in the near future as an opportunity and make those decisions picking up another block from someone who may need to sell. We are fortunate though in that, even though we’ve been through some uncertainty lately, the profitability of most of the agricultural sectors are actually pretty good.
Do you expect to work more closely with your farming clients to update their financial plans?
I think if you don't constantly work on your financials, you run the risk of complacency. I've been on the phone to clients this morning on what they're doing with their MPI registration and where they're at with their financial plan. In that regard we’re still talking to all of our clients about the same stuff; making sure there’s a plan in place, reducing risk, making calls where possible and checking how they are tracking against this plan. That's kind of business as usual stuff effectively. There may be some others that need a little bit more help because they're a bit larger scale and may be struggling on the isolation management front and ensuring they have enough capability on their team to deal with key issues that arise.
For many of our clients, although it’s a tough time, we know what they’re looking to make cash flow wise and looking forward to the next 12 months. There’s nothing better than having a reasonable level of comfort about production capability or price sensitivity during these what-if moments as we continue with volatility and these rather large and more frequent speed bumps.
This type of market reaction is only going to make it more important to understand your numbers: what’s your break even milk price? What's your break even carcass weight?
Practice what you preach, we're doing that in our own accounting business. We’re saying we need to be clear from FARMits perspective: What’s the bare minimum we need to achieve to cover business outgoings to ensure we are resilient too?
If you don't really plan, this is the time if never before to get into financial planning in detail, no question.
*Please note this interview was conducted last week, so business practises and perspectives may have changed with the rapidly evolving climate.