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Guest article: Cash management becomes the priority as market pressures mount

As dairy commodity prices remain subdued, at the same time as production costs remain high, which are potentially increasing on the back of global events, together Oxbury Bank and Kite Consulting have issued a joint ‘Red Alert’ on cash management.

The negative differential between income and the cost of production for some farmers is already in double figures, and the cash burn on farms is rapidly eating into surpluses made during the peak of milk prices last year. At the same time many businesses have remained ill-prepared for their tax obligations in January.

“Currently we can’t see any prospect for a major upturn in commodity prices, and thus milk prices, any time soon,” says Edward Lott, director of Kite Consulting.

“The short to medium-term market fundamentals remain poor, and we are now recommending that some farmers budget in the low 30p range, depending on who their milk buyer is. We hope it doesn’t drop to that level, but we currently can’t rule it out. Meanwhile, many producers have costs over 40p.” At the same time, high interest rates are likely to dry-up lines of credit that were in-play during the era of low-cost money, for example from feed companies or merchants.

“Our view is they aren’t going to lend farmers money like they used to. Many high street banks are also getting restless, and no longer have as much agricultural expertise or empathy as they did before. They are putting more pressure on businesses, by asking for greater detail on likely cash flows and borrowing requirements, and in some cases are requesting mid-month projections as well as end-of-month ones and are refusing to cash cheques. “This all means that working capital management is back with vengeance,” adds Mr Lott. “We haven’t had to worry about this for a while because money has been cheap, and margins have not been in negative territory. But it should be a priority for all businesses now.”

Nick Evans, co-founder and managing director of Oxbury Bank – the UKs only dedicated agricultural bank – acknowledges the growing cash flow challenge but urges farmers to remain calm. “Don’t panic, and talk to your bank, and maybe us too if you aren’t a customer. We are entirely committed to agriculture and believe in the long-term future of dairy. We understand that the fortunes of the sector have always been cyclical. The current downturn will feel sharper because of the higher peaks we have seen in 2022, and now we’re going through the lows, but the market will settle back to a more sustainable price – historically it always has. But we recognise that there is an immediate cash crisis brewing for some, and we are working hand-in-hand with our farmers regarding their borrowings and cash flow.”

Oxbury Bank’s chief risk officer, Robin Hill, states that the solutions to cash flow issues are unique to individual situations, but typically fall into two broad scenarios:

1. Increased working capital facilities to help a farmer through the situation. This is usually applicable where facilities have been historically low, or non-existent
2. Proactive management of the current debt to ensure the actual repayment, rather than the contracted payment, is in line with the ability to pay. This can include a payment holiday or moving to an interest only period.

Fixed, rather than flexible, costs and finances can be trickier to vary – for example hire purchase rentals, rents, labour and interest charges. The latter in particular is causing unexpected increases, and in many cases unbudgeted increases, in fixed costs.

However, the good news is that lenders have a duty to work with their clients. “The first action is to speak with your bank if the repayment of the debt is not manageable within existing cash facilities,” advises Mr Hill. “Do not bury your head in the sand, as ignoring the issue will not make it go away and is likely to make it worse in the long run. The same will apply to a lesser extent to land rents – talk to your landlord regarding deferral or a temporary reduction.”

Mr Evans added: “If you haven’t reviewed and optimised your variable costs and think you need to shave more off, then work with advisors to do so. They will help determine what your optimum cost of production will be, which isn’t necessarily the lowest cost of production. They will also help you benchmark your costs against comparable farms with similar systems, to show where savings and improvements can be made.” The sooner action is taken, the better the situation will be in the long run, advises Mr Lott.

“Cash flow problems are generally cumulative if action is not taken quickly and decisively. They can build up in the business, in the bank, in a farmer’s mental health, until one or all of them snaps. It doesn’t have to be the case, which is why we are issuing this red alert now. There are solutions to many problems, so be aware, and be ready to act fast.”

To find out more about Oxbury Bank, click here.

FEATURING: Brian Harvey
As head of PKF Francis Clark’s agricultural sector group, Brian manages a dedicated team of agricultural accountants and tax advisers. He hails from a Cornish… read more
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