Farm incomes could face a sharp drop this autumn due to the summer drought, so it’s important for farmers to plan ahead to minimise the financial and physical impact.
There is plenty that producers can do to prepare, according to rural accountant Old Mill, from raising an overdraft to pay for forage to reducing tax payments on account. “It is a very frustrating and demoralising time for both livestock and arable producers,” says Mike Butler, chairman of the board at Old Mill.
“The drought means arable yields will be down, vegetable producers are looking at significant crop shortages, and livestock producers do not have enough forage to see them through the winter. This will have a dramatic impact on cash flow and profits.”
Higher commodity prices will go some way to alleviating this pressure, but the impact will vary from farm to farm. “Try to think about the implications of what’s going on, and have a serious conversation about what might be the right thing to do,” advises Mr Butler. “Have talks with your bank and accountant to see what the best solution is.”
Some farmers are already looking at culling up to half their herds to reduce forage requirements over the winter, while others may need to raise their overdraft to cover increased feed costs, he explains. “If selling stock, that will of course reduce your output, and may crystallise some profits. But cull cow and store values are already suffering, so you need to take that into account.”
If looking at alternative feeds, it’s important to consider the likely impact on productivity – but there may also be an upside. “When commodities are in short supply there is likely to be a dramatic rise in prices – if that does happen, make sure you’re in a position to take advantage of it.”
However, in the immediate future, it’s important to prepare for reduced incomes. “Are you getting the right tax credits? Could you reduce tax payments on account? Although July payments will already have been made, if you think income and therefore tax bills will be down you can choose to reduce your payments on account at any time.”
Cash flow planning will help to identify any pinch points, so you can act early to avoid them, adds Mr Butler. “The important thing is to understand the implications as they develop, and be proactive, rather than putting your head in the sand.”