Latest / Dollars In The Dirt / #035 - The TRUTH About Scale, Finance and Risk in Modern Agriculture

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#035 - The TRUTH About Scale, Finance and Risk in Modern Agriculture · Dollars In The Dirt

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  People think farmers get rich every time the price of lamb goes up. Here's why that's not how
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  it works. You've probably seen the news recently about land prices being record breaking. The
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  reason why is because we've been in a drought for the last two and a half years. You're not going to
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  get reached by the fluctuation in land price, like getting rich. Takes time and it's consistency over
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  a long period of time. This is a pretty insulated view and it's a bit of a lazy farmer. I had a
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  friend say to me one day in relation to agriculture, some people think that they're going
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  to be good in AG because they're big, whereas the reality of things is that the guys that are big in
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  AG are good. That's why they're big. This is true. The guys in AG are good, are not necessarily
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  big, but they get big because they are good. If you jump way ahead, double your acres just because
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  your banker says you could, I can just tell you from my experience, guys, and watching some of
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  these family farm operations, that's a recipe for disaster. This is so true. We see it all the time.
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  Hi guys. Got some reaction videos to look at today. Um, I'll share my point of view with what I think.
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  Um, it's relevant with each of the videos and in my point of view, with with what I think about
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  them. I had a friend say to me one day in relation to agriculture, some people think that they're
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  going to be good in AG because they're big, whereas the reality of things is that the guys
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  that are big in AG are good. That's why they're big. This is true. The guys in ah are good, are not
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  necessarily big, but they get big because they are good, which is what Danny is saying here. And I
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  think that's, um, it's very, very true what he's saying here. Why? They're big. I went for a little
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  drive the other day through southern Queensland and into New South Wales, and I caught up with
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  five families. One of them had many hundreds of millions of dollars worth of property. Three of
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  them had well over $1 billion worth of property. And they're largely unknown. And, you know, you go
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  and meet these people. It's a real privilege. They're very welcoming of you. And all of them
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  said to me when I was leaving, thank you for taking the time to come and see us. Isn't that
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  remarkable? Unbelievable. Yeah. We really appreciate your time. We know you're busy on the other side
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  of that. This is so true. And this is the the privilege of the the job that we do. You know, some
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  of the families that we get to work with and help them grow their businesses and, and expand over
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  time. And, and they're just so humble. And it is a it is a privilege for us to work with some of
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  these amazing farming families and, and watch them where they go and where they start. And, and it's
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  just, um, you know, what he's saying is very true. And it's quite humbling at times to, to work with
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  them and see them expand. A lot of people, when they go into the bank, they feel like they're
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  going into their principal's office, or they feel about two inches tall because there's a gap in
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  knowledge there. It's a half arsed balance sheet and half ass annual cash flow that they filled
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  out in the truck before they walked into the doors. They were asking for a $2 million operating
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  line or a $5 million land note. You know what I mean? Like, it's funny, like when you think about it,
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  it's like this is really happening. Your banker is an investor and you're. This is so true. And we see
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  this all the time. Most producers are good, are good farmers, and they're good at what they do. But
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  when it comes to the finance side of things, it's um, often you can we often see it, it's it's half
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  arsed and, and and it's not the bank's fault. Um, in these circumstances, you know, they often the loan
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  might get knocked back or there might be a million questions asked, and it's because the
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  information being provided is is not at the level that it's expected for a sophisticated farming
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  business. And, and that's, you know, we often get customers come to us and say, you know, the bank
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  doesn't understand what we want to do. And and this is it. You know, they'll go in there with half
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  arsed information and then and it's not their fault because they don't know. But the issue we
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  have is around if the information isn't right, they don't get the result they're looking for. And
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  um, you know, you can get ripped off by the bank potentially, if you get offered a deal that isn't
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  isn't competitive because they know that you don't know anyone or anything else or anything
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  better. So, um, having the information right and having the right people around you to make sure
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  that, um, there's plenty of support out there to make sure that you're getting the right deal and,
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  and you're not getting ripped off your real estate, your farm ground is the number one asset
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  on your balance sheet that has the highest store of value that every banker wants. If your banker
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  is using your real estate to secure your operating loan, you better be negotiating a much
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  better interest rate, because the level of risk from an operating loan being secured by farm
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  ground that's easy to sell, has a high store of value, and doesn't go up and down a lot, versus a
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  line of credit being secured by your current assets, which is your grain inventory, your crop
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  inputs and things like that. Those things can move these lines. Operating lines are more common in
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  the US. But, you know, in Australia it's dead right. What they're saying here, you know, like the the
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  bank will tie up all your farmland to then secure your operating lines. And they also, most of the
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  time take all the security over those operating lines as well. Which means you're tying up all
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  your current assets, all your non-current assets with your bank. And and they'd want to be giving
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  you a good deal if they're going to tie up all those assets a very good deal, because often
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  there's a lot of equity in all those assets, and they probably don't need all those assets to
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  secure the loan that they're looking at. So, you know, this example is a is a US example where it's
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  more common around, um, having big operating lines for your grain inputs and different inputs. But it
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  does also stand in Australia as well, where, um, you know, there is there is facilities out there for,
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  for those sorts of things that, that don't rely on tying up your real estate assets to do it. So
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  making sure you got the right person navigating through that to make sure that you got the right
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  product in the right bank for your situation. It's crucial to get that right average. If it goes to
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  just the first level of court, it's about 25% of the estate. Generally we see that's insane. That's
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  insane. Barristers on both sides have all the prepping barristers. You have the lawyers like it
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  is this huge dollars. And then this is why it's straight up like that. Yeah 25% of everything you
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  built. See you later. This is quite common. We're seeing it a lot at the moment around, um, you know,
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  marriage, break-ups and that sort of thing. And the and the the reality and the impact that has on
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  the business. And how do you fund you know, the lawyers here are taking 25% of the estate
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  straight up. So it's really important that you have structures in place in your business,
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  especially around a succession point of view. Um, you know, the next generation of of the family
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  coming through, you know, they've got their, their husbands and their wives. They become business
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  partners. You know, if there's a marriage breakdown at that level. Um, you know, that could potentially
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  cripple the whole business. So, um, and there's ways that you can you can protect a family farm around
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  that. It's just making sure you get the right advice early and and getting the structure right
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  with your accountant, your lawyer, your broker with your bank, um, and making sure that that's set up.
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  So I know that people don't want to afford. Think and think about that sort of, um, issue impacting
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  their business. And, you know, everyone goes into it with the right intent. But, um, as a good business
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  and to protect your business, um, it needs to be in the back of people's mind, and structures can be
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  put in place that are, um, can help, you know, if there was if something wasn't going to plan, if
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  Australia was a business, the executives probably would have been sacked. You've got politicians
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  knocking on your door now, what would be on your wish list for them? I think it's consistency and
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  remove ambiguity and what we're what we're actually playing for. The ground level policy
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  ideas I think are all relatively robust. Everybody's arguing them out. They're well
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  modelled. They're well planned to a degree. Um, but we don't really know what we're actually playing
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  for as a country anymore. I don't think. What do you mean by. Where are the goalposts? The rules. Um,
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  Australia? Yeah. This is so true. What's being said here? You know, like the government we don't really
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  from. Especially from an agricultural point of view. Like, where are we heading? What's our purpose
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  in this? In this whole industry? Um, you know, the government doesn't seem to have much,
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  um, love for agriculture at times. And, you know, we're this country's built on the back of
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  agriculture, so it should be a top priority, in my view. And and what we're saying, what Charlie is
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  saying here around not not, um, you know, not having understanding the rules and everything seems to
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  change. You know, tree clearing laws, you know, water, all sorts of things. Legislation is constantly
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  moving. Um, there's so much legislation to try and develop your properties. Um, you know, we need to
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  really have a, you know, peel it all back and get back to basics and remove a lot of the, the
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  bullshit that's that's out there. Um, for people trying to get ahead and, you know, it's it's been
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  proven this current budget proposed budget changes like it's just, you know, it's just some of
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  the some of the stuff being proposed is just complete bullshit. And it's not going to help, um,
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  farming families get ahead and continue to grow and expand their businesses and, and feed the
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  nation just quickly. If you're tired of explaining your operation to a new bank manager every year,
• 8:18
  only to get a one size fits all deal that doesn't fit your business, we can help. At Season Finance.
• 8:23
  We do things differently. We've got over 70 years of combined experience in agricultural lending,
• 8:28
  and we work for you, not the banks where the consistent expert team in your corner fighting to
• 8:33
  get the finance that actually helps you grow. Purchase the next property and build your legacy.
• 8:38
  Don't leave money on the table. If you're looking at your next move, we'll just want a second
• 8:41
  opinion on your current setup. Click the link in the show notes to book a confidential, no
• 8:45
  obligation chat with the team and we'll show you what's possible. Righto guys. Now back to the
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  episode. People think farmers get rich every time the price of lamb goes up. Here's why. That's not
• 8:55
  how it works. You've probably seen the news recently about land prices being record breaking.
• 9:00
  The reason why is because we've been in a drought for the last two and a half years. So because of
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  the drought, a lot of farms are running a lot less sheep than they normally would. We're running at
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  half capacity and because there's less lambs around, but the demand is the same. The price goes
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  up, which that price, depending on the farm, might cover what it's cost to keep those sheep alive
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  the last two years. Yeah, this is a pretty insulated view, and it's a bit of a I think she's
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  it's a bit of a lazy farmer look at things really because she's only looking at her own operation
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  here. And the progressive operators are continuing to operate, um, even when prices go up and down,
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  when droughts come and go. So, you know, looking outside her own farm here, you know, there'll be
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  ways to generate income, um, and keep, keep the business rolling rather than just focusing on, on
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  a dry period at one point in time. And so, yeah, it's, um. Yeah, it's an interesting view. So
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  if you come in and you're a big operation doing multiple millions per year in revenue, and you
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  have a big amount of equity on your balance sheet. That is a very dangerous place to be. And the
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  thing is, if you got a big balance sheet with a lot of equity, that bank is going to loan you as
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  much as you want until you get to that breaking point. And then they're going to try to pass you
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  on, because at the end of the day, the bank is a for profit institution. They are there to make
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  money and get a return on investment for their shareholders. Yeah. This is so true. Like often see
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  we often see people come to us that have got big balance sheets and not a lot of debt. Um, you know,
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  the banks prepared to give them up, but is it the right decision? Is it? Do they have the structures
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  in their business to be able to handle the debt? Um, you know, it's all good to, um, you know, to, to
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  have a big balance sheet. Um, but to then use that effectively is critical. And, um, each business is
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  so different, and, and it is a bit of a trap that, you know, because you've got that equity, you go
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  and borrow the money, but you got to make sure that that that borrowing is working for you. And
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  it's not just creating bad debt in the business. And eventually, you know, the equity can run out at
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  some point. And, um, you know, the good operators have a really calculated view on on how they're
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  going to use their equity and making sure that it's using it's being used to to leverage and
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  grow the business, um, for the longer term goals of the business. So, um, yeah, it's very true what's
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  been said here. If you jump way ahead, double your acres just because your banker says you could, I
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  can just tell you from my experience, guys, and watching some of these family farm operations,
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  that's a recipe for disaster. Why? Because they tried to double an operation when the foundation
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  of their business was not established. This is so true. We see it all the time. You know, there's
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  there's businesses that go and grow and expand their business because they because they can or
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  because they for the sake of just growing or because the neighbours are buying properties, they
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  go and buy properties. Um, it's it's regular. But if the foundation of the business isn't right and
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  the and the systems, the financial management is not fundamentally, um, at a level that can handle
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  a doubling the size of the business, there's no point doing it. You need to get the financials. You
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  need to get your systems in place. The human resources, um, the management of the property, like
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  its all needs to be considered before you just go and double the size of your operation without
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  really planning about that. And that's where, you know, having the right professionals around you to
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  make sure that you know you're getting the right advice. They're they're questioning and pushing
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  back, saying, you know, how is this going to work? And if any of my clients come to me wanting to
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  double the size of their operation, you know, the first thing, it's not about whether we can get
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  them the money. That's the that's the easy part. It's about it's the it's the ongoing management
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  being able to, you know, is the family dynamic right around, you know, is the, you know, the kids
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  ready to take on more, more, more acreage, more debt. Um, you know, it's the financial management in the
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  business. Often you're going from a, you know, where a level where you don't have to have a lot of
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  financial management in the business to a level where the reporting for your funders and that
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  sort of thing, it steps to a whole new level. So, you know, we often push back, um, at the start to
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  say, you know, have we got all these things right before we just go and buy another property? Um,
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  there's no point going in and buying. And then two years down the track, you work out that you can't
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  handle it or can't manage it, and then we've got to sell it. So, um, we're not in the business of, you
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  know, buying properties for 2 or 3 years. We're in the business of buying them and being in the
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  family for forever. So, um, that's that's how we look at it. We're not just looking at it from a
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  transactional point of view and getting the money out the door. It's more from, you know, is this the
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  right step for the family? Is this is this going to improve your business? You know, are we getting
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  the right return on capital here? And and how does that how does that fit into the whole the whole
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  family strategy and goal. Thanks guys. Hope you enjoyed the videos today. There's some interesting
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  points of view there, and I hope you get some insight into my thoughts on on the different
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  videos that we've looked at today. If you've got a different point of view or think I've got
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  something completely wrong, put them in the comments and and let's have a chat. See you in the
• 13:43
  next episode. Thanks for tuning in. Dolls in the dirt. If you've got value from today's episode,
• 13:48
  make sure to subscribe so you never miss the insights you need to grow your business. And if
• 13:52
  you're ready to stop being just another number to the banks, visit Season Finance via the link in
• 13:56
  the show notes. Remember to follow us on socials and catch you next time.