Ag looks risky to those on the outside

Ag looks risky to those on the outside


Agribusiness
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Many farmers I know believe they are risk averse, but quite a few people outside agriculture tend to think the opposite.

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Many farmers I know believe they are risk averse, but quite a few people outside agriculture tend to think the opposite.

There are not too many industries where the operator spends the vast majority of the money upfront, has to deal with the vagaries of the weather and commodity prices, and gets paid at the very end.

When I explain to people outside agriculture how the economics work, they are staggered that anyone would take on such a risky venture.

Looking at it from the outside, I guess that view makes sense.

The majority of agribusinesses are multi-generational. It's what they have been brought up with, and seems quite sensible to them. "It's just how it rolls", I have heard said through the years, and I may have uttered these words myself.

I am about to talk about finance ratios, and different asset classes. This is definitely not advice - you should go to your financial planner or accountant for that.

The perceived level of risk in agriculture is demonstrated by the banking finance ratios, the main one being loan to value ratio. In agriculture, LVR is normally 60 per cent to 70pc. This leaves some room to move if a run of poor seasons is experienced. Most agribusinesses would have a LVR of much less than this, but it is not uncommon to have the ratio hitting the ceiling for a few years after an expansion of the business.

In residential lending, the LVR can be up to 95pc. While I'm not sure this is a very good idea, it is certainly possible if you meet the criteria.

The market for residential property is much more liquid than for farming property, and this is one of the reasons for the difference. It is easier to sell the asset to recover the outstanding loan.

Most agribusinesses have large amounts of equity buried in the balance sheet. That is the ability to borrow against the value of the land. Being able to borrow, and being able to service the loan, are, of course, two entirely different propositions.

This concept is not new, and lots of agribusinesses have used the equity in the farming land to borrow to buy off-farm assets.

This strategy can be an option to deal with succession planning. It is not a short-term strategy though, and takes some time to reap the rewards.

Some agribusinesses pour every cent back into the farm, and have kept on expanding solely in agriculture. I have seen many wildly successful examples of this.

Risk is in the eye of the beholder. The take home message is its best to have a plan to build up the asset base.

Whether that be on-farm or off-farm is for the individual to decide. I just know whatever the plan, if it is executed across a period of time, it will make the task of succession much easier.

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