FARMVIEW Season 2 Episode 5
Episode 5 - Business planning
University of Melbourne
Old man drought is a big part of [inaudible 00:00:13] horticulture and always has been. You should never be surprised when it gets dry and you have got no water. So the rule that I say is prepare do not predict. Do not worry about when it is going to happen, it is going to happen.
I tend to say do not only focus on drought because drought might be the final straw that might send the business broke but it does that because the business has some fundamental weaknesses. If your business is strong you will survive a drought. That is the rule. People talk about climate change and drought as physical problems that there is less rain and it is hotter. They are actually economic problems and there are economic solutions to them. It means being more flexible in what you plan to do. It means for some of them having a water business and a horticultural business. For others it means going to a lot of trouble to guarantee the water supply you need for your permanent water demand, which is your tree crops and then having some options to act opportunistically with, like annual crops, vegetables and that. Having a mix of activities, it is as simple as not having all your eggs in one basket, but really it is like a portfolio within your business where you have got your permanent needs pretty well covered, but you have also got the opportunity to cash water and trade it. People tend to take a defensive view of risk and I argue that in fact risk creates opportunities and in fact one of the great truisms of economics is that risk creates return.
So it is no all be head. In fact if you want a low risk life, if you want a low return life, you take no risk. One of the best things you can do to manage the risk of any sort, and particularly drought, is to be very good technically at farming. If you sold all your assets and paid all your debt equity is what you are left with. Now the right amount of debt is the amount that you can service, the interest and principle payments that you must meet every year, but the really good farmers have what is called a reserve of borrowing capacity. They are not borrowed to the limit so that when the bad times come, being prepared and do not predict, when the bad times come they can borrow more. They have a reserve borrowing capacity.
There is a saying in farm planning that plans are useless and planning is useful and what that means is the process of thinking about your future, of drawing up some alternative plans, of setting out ways of achieving your goals or doing some sums, doing some arithmetic is a really useful thing to do, but do not believe the plan that you have set out will actually happen. It will change, it changes all the time because the world changes.
Now the good farmers that I know in this planning process, they not only have mastery of information within their own farm, but they also have mastered the information about their own industry. They look beyond the farm gate, the know a lot about the statistics, the fundamentals, the state of supply, the state of demand in their industry, the state of the exchange rate, the state of prices, the stocks of suppliers around the world, the plantings that have gone in for permanent crops because to make a long term or medium term decision, for medium investments you need to have a view about the fundamentals. That is the basis on which you can then make your plans how you are going to operate within that industry.
It is really instructive, I find, working with farmers to say "stand here, now walk out 8 paces, turn around. You are now 8 years out. You tell me where you want to be in 8 years time?" When you get that right, then we will spend a bit of time thinking about how we might get there because there are many ways to achieve a goal and we want to do it the most effective way and the way that has got the best chance of success. Imagine the future and then think of alternative ways of getting there, weigh them up – and when I say weigh them up, I mean do a few sums. It is no elaborate, it is simple arithmetic and the approach is call sophisticated thinking but simple sums and a few bits of arithmetic can be really powerful about if I pursue this path in 5 or 8 years time, here is the expected cashflows, here is the expected returns, here is how many of my goals I would hope to have achieved and along the way I know things will happen that I cannot predict.
So agriculture and horticulture can be as good an investment as there is in the economy in the right hands but it all comes down to mastery of information within and beyond the farm gate.
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