Financial management during drought recovery

Primefact 48  |  Second edition  |  December 2018

This Primefact was researched and written by Tony Hudson, Director of Hudson Facilitation Pty Ltd, an independent farm consultancy.


When the drought breaks, most farmers will be looking to improve productivity and profitability as quickly as possible. Doing so involves considering a range of options and making numerous decisions, all with differing impacts on the business. Reduced revenue and increased feed costs will have tightened working capital for many farmers, but to bounce back you need access to cash to sow next year’s crops, buy replacement stock and meet your financial obligations to keep the business running.

Managing all this can seem a daunting task, so this paper outlines some practical suggestions to support farmers on the road to recovery from drought.

Take stock #1 —to farm or not to farm?

Invest time in a little soul searching; speak to trusted friends, advisors or family members. Is farming still what you really want to do with your life? Is it time to consider other options? You may have more options than you think. This is possibly the most important decision for you and your family, so give it the time and energy it deserves.

When taking stock it may be helpful to consider developing a succession plan if you don’t already have one, or to update it if you do. The Rural Financial Counselling Service, banks and advisers can help with succession planning (contact information below).

Take stock #2 if yes to farming — what is our financial position?

Cash flow has likely been strained; your equity position may have deteriorated too. In order to plan the best way forward, you need to understand the true financial position of the business – it underpins your capacity to continue farming and obtain finance. Prepare a complete Statement of Position including all assets and liabilities and calculate your equity in dollars and percentage terms. For accuracy, use fair market value for land, machinery, livestock, fodder and grain. It is possible your equity position has not deteriorated as much as you fear; many regions have continued to experience increasing land values despite the drought. While all businesses differ, an equity level below 50% is typically considered at risk; greater than 75% is quite secure.

Take stock #3 — review #1

Once clear on your financial position, reconsider your initial reflection.
How might life be if you were doing something else? Is farming still what you really want to do?

Take stock #4 — how are you?

Farming is tough, both physically and psychologically, and more so in drought. How are you really travelling health wise? It might be time to visit your GP for a check-up. Remember, no matter how challenging things become, you are not alone. It’s important to look after your fitness, nutrition and mental health and to stay connected with your community. The recovery from drought will be more successful if you are in good health (see contact information below)

Cash flow projection

Cash flow may be second only to moisture as the most limiting resource as you recover from drought. The overdraft is likely heavily drawn and may need to be extended to cover costs. Before speaking with your creditor about this, prepare an accurate month to month cash flow projection for the next 12 to 24 months, maybe longer if your recovery plan will take longer. There is a lot you can do to make the most of this scarce resource:

Cost control - identify and prioritise those expenditures which are critical for production (such as animal health costs, fertiliser, and chemicals) and those which are not, (such as overhead costs and capital expenditure). Be disciplined and make sure your cash goes only where it is most useful. Consider enterprise options (e.g. sheep, cattle, cropping etc) with the lowest costs required to generate income.

Improve finance terms - speak to your creditors about refinancing/restructuring your debts. Consider the following options:

  • Limit principal repayments – refinance Principal and Interest (P&I) loans to Interest Only
  • For loans that must be P&I (often the case with equipment loans) consider extending the loan term by a couple of years to reduce annual repayments
  • Restructure debts requiring monthly/quarterly payments to annual in arrears payments
  • Restructure some or all of your overdraft debt. Overdrafts tend to attract a higher interest rate than fully drawn loans, so if a portion of your overdraft has become ‘hard core’ (if it is unlikely to be repaid within a year), consider transferring that portion to an interest only, fully drawn loan to reduce the interest cost on that portion of your debt
  • Speak to creditors and seek more favourable payment terms. It may be less expensive to have a creditor other than your bank/overdraft depending on the cost of the debt — you need to ask around to identify the lowest cost credit you can access.
  • Ensure your interest rates and other creditor fees are as low as possible — speak to your creditor about an interest rate review and see what they say
  • Speak to a new creditor — if your financial position is sound, you may be able to save interest/fees by changing creditor, or at least advising your existing creditor you are prepared to shop around
  • Contact the NSW Rural Assistance Authority (RAA) or the Australian Government’s Regional Investment Corporation (RIC) to apply for government subsidised loans, rebates and subsidies for drought-affected farm businesses. Details of how each organisation can help are available online or by phone (contact information below).
  • Farm debt mediation may be required. You or your creditor can initiate this, and it’s best done before equity in the farm deteriorates significantly. Any creditor wishing to take action against a farmer must provide an opportunity for mediation — i.e. a structured process with an independent mediator to attempt to negotiate an agreement for repayment of the debt. The RAA provides information and resources about farm debt mediation and administers the Farm Debt Mediation Act 1994 (NSW) (contact information below).

Prioritise income - any income will be useful and sends a positive message to finance providers as well.

  • Consider farm enterprises which will generate short-term cash flow
  • Sell non-essential machinery, inventory and other assets (including land)
  • Look to insure future earnings against drought where possible
  • Seek off-farm work/income if possible
  • Withdraw Farm Management Deposits if necessary

Case study 1: generating income

A predominantly cropping farmer is enduring a poor harvest. Income for 2018 is well below budget and credit lines are stressed. Realising there little can be done about the crops other than hope for rain; the farmer manages to gain off-farm employment in September at a local processing business. Almost $70k worth of machinery is identified that was surplus to needs and sold, realising a discounted $55k in total. A decision made earlier in the year to take a multi-peril crop insurance policy means a significant income stream will come in after harvest when this policy is realised, as well as some crop income for the grain harvested. While total income will be well below budget, the impact of all of these endeavours will provide around $170k of income, which would not have been there no action been taken. The farmer’s bank has been very supportive as a result of these actions.

Enterprise choice - sheep versus cattle versus cropping … and how?

Directing limited cash to key production costs is the first step; considering the most efficient enterprise alternative is also critical. While restocking may be your preference, it can also be costly, particularly as demand and prices for stock increase coming out of drought. The most common question for livestock farmers aiming to lift numbers is whether to purchase replacements on an inflated re-stocker market, or breed up from numbers retained through the drought. Answering this question is complex. Funding the purchase of livestock tends to take you more deeply into debt, however it also likely leads to more income more quickly as land is fully stocked with more saleable animals produced each season. Conversely, breeding typically leads to less initial debt, but it also produces less cash flow until stock numbers have returned to the desired level. This decision requires modelling the results of the various scenarios over several years, not just the current year. This is best done with support from your livestock agent or consultant, and by considering commodity outlooks for each option such as those provided by the Australian Bureau of Agricultural and Resource Economics and Sciences.

Selecting a livestock enterprise is challenging and post-drought may be an opportunity to change your enterprise focus. Infrastructure, handling facilities and other factors may limit options, however the questions at the conclusion of the case study below are worth considering when electing which enterprise to run. Considering possible gross margin performance will also be useful. Critical to each decision is reflecting back on your Statement of Position and knowing your access to cash (via overdraft) following discussions with your creditor. Your gross margin will give an indication of enterprise performance when fully stocked, however more important is ensuring access to sufficient funds to get from where you are now to where you would like to be. An alternative enterprise may be prudent in the short term. The case study below examines this point.

Case study 2: enterprise choice

Directing limited cash to key production costs is the first step; considering the most efficient alternative is also critical. While restocking may be your preference, it can also be costly, particularly as demand and prices for stock increase coming out of drought. Consider the following case study comparing the costs to utilise 100ha of land which can carry 8DSE/ha. Option 1 assumes a purchase of 400 ewes for $300/head, compared with Option 2, which assumes full contract rates to sow a wheat crop.

Purchase 400 Ewes


Total Cost

Sow 100ha Wheat


Total Cost

Purchase ewes












Husbandry general






Pasture ($/ha)














Total Cost (100ha)



Total Cost (100ha)



While the analysis presented above is simple, it illustrates a critical point: the impact on cash flow of enterprise choice. Faced with this choice, the decision to restock requires $93,200 more cash in the short term than planting wheat and may limit your ability to do other things, or may strain your credit relationships. It is also important to consider the length of time between expenditure and income from each enterprise when making this decision. Some dispassionate analysis is required to plan the most efficient way forward.

Critical questions to consider:

  • How much will this enterprise cost?
  • How much income can I make from it?
  • How soon will that income be received?
  • Is this the best use of available cash?

Once you have undertaken all the above steps and prepared your Statement of Position and Cash Flow Projection, you will have identified your finance needs clearly; how much do you need and is it best funded through an increase in the overdraft, a longer term loan, or a combination of these?  Now it is time to meet with your creditor.

The farmer-creditor relationship

No matter how uncertain you are about the future, avoiding your creditor will not help. Being proactive will put you in the best position to gain their support. You are one of many farmers experiencing financial hardship and your creditor understands this and has a vested interest in helping you succeed.

The Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry led to more careful lending practices and this will likely continue. It will help to secure a better deal by planning thoroughly and providing your financier with the information they need. So, what do they want? It’s all about ‘The 5 Cs’.

The 5 Cs

Cash flow - the business must be able to demonstrate capacity to generate adequate cash to meet all costs including interest payments. Revenue calculations need to be calculated using reasonable and achievable assumptions for yields, commodity prices and costs.

Character - your management expertise, integrity and honesty. Previous and future conduct with the creditor is important here. A poor credit history makes you a much higher risk. A proven ability to handle difficult times and capitalise on opportunities reduces perceived risk.

Capital - your financial position and that of the business – your assets, liabilities, net worth, equity position and debt ratios. The higher your equity, the lower the risk.

Collateral - the saleability and adequacy of the assets you provide as security for the loans. Adequacy is simply the amount of security — creditors express this as Loan to Value Ratio (LVR). A loan of $600,000 against a farm worth $1 million gives an LVR of 60% — the lower the LVR, the lower the risk. Assets such as livestock, grain and machinery tend to be less appealing forms of security, are more risky and therefore attract a higher interest rate when used as security.

Conditions - what is happening at a macro level to the industry in which you operate? If global markets for rural commodities are generally strong, demand for land is sound. How does the business manage external risk: interest rates, exchange rates, variation in climate and commodity prices? You cannot control them all, but good management can reduce the downside risk. Consider the change in perceived risk from a creditor who had loaned funds to a live beef exporter when the federal government banned live exports to Indonesia.

A very useful fact sheet Understanding a Bank’s Approach to Farm Business is available on the Grains Research and Development Corporation’s (GRDC) website.

The Farm Decision Making Checklist at the end of this document is a useful guide to some of these points. The checklist was adapted from the Commonwealth Bank booklet FARM (Finance Agriculture and Rural Management), 3rd Edition 1992.

5-10 year business plan

While each of the above are important, creditors are now asking business borrowers to provide them with a full business plan. Business plans that address risks and preparedness and provide a roadmap for achieving the vision of the business will enhance the likelihood of success. There is far more benefit in writing a business plan than appeasing your creditor. A good plan should outline whether the farm can (in normal circumstances) provide the lifestyle you want. Reflect on which scenarios are realistic and achievable within an appropriate timeframe and which are the most likely to provide a good financial return. Despite fluctuations in costs and income, a business plan for the next 5-10 years will help you make better decisions and also help you to be better prepared for the next drought. A business plan does not lock you into a set course of action, it serves to identify your goals and how best to achieve them with the information you have at the time. It should be considered a living document and reviewed and re-cast at least annually. It will also help you track your progress over time and will show you what you have achieved so that you can celebrate your success. Consider employing the services of an accountant or consultant to help you develop a business plan. Below is an outline of areas you should include in a suitable business plan for a creditor. Be aware though, that business plans are very important documents for running farm enterprises successfully; that should not be developed primarily for consideration by creditors:

Overview of the contents of a business plan

A clear, concise title page with your business name and contact details.

An executive summary outlining the amount and type of loan applied for, giving the creditor the opportunity to accept, modify, improve or reject the loan. Clearly state the purpose of the loan and how it will be repaid. Also, briefly describe the business structure (sole trader, partnership, trust or company) and relevant financial ratios – historically and projected if the loan proceeds and the business is successful.

Clear goals and objectives - include a mission statement that details the direction of the farm business and the family who own it.

A management profile - remember that creditors lend to people. One of the most important resources of a farm business is its staff. It is important to highlight the experience, qualifications and background of all members of the farm family/farm enterprise as well as key advisors.

A physical plan should include location maps, photos, discussion of any special attributes such as highway frontage, conservation areas, proximity to town and soil fertility. If you have a property management plan, share that too. Creditors place a major value on your major asset or land. It is in your interest to present it in its best light.

A production plan should discuss such things as additional costs over and above the usual as a result of the drought breaking. Outline assumptions for all projected yields, prices and input costs. This enables you and the creditor to understand the differences in the budget forecast for when the drought breaks, compared with your actual performance in previous years.

A development plan should highlight any strategic plans or significant changes from previous years, e.g. anticipated capital purchases in coming years or changes to enterprise mix or management control. Discuss any areas where there is a slightly longer pay-off period, such as breeding programs and spreading lime.

A marketing plan enables creditors to see your attempts to manage income as well as costs. Examples may include forward contracts and strategies to aim for improved pricing, negotiating reduced commissions; having a range of selling methods, such as selling direct to feedlots or abattoirs; or perhaps production changes in micron (fibre diameter),or breeding to meet client requirements.

A financial plan should give the creditor a complete picture of the farm’s performance. By now, the creditor has had a chance to build up a perception of what the finances will look like without any unpleasant surprises. Creditors will often ask for the past three years’ tax records, but they should be accompanied by the past three years’ management records. A cash flow statement along with a list of assets and liabilities will be expected. Ideally you will also provide several years’ future projections for financials, including profit and loss, balance sheet and cash flow together with relevant financial ratios.

An exit strategy - ideally you will be able to repay your debts in line with your contracts, but if you can’t, a clear strategy identifying what else you can do reduces the perception of risk. This may include in order of preference and include an assessment of the likely value realised from: 1. sale of any non-farm assets, 2. sale of non-core farm assets (perhaps machinery, livestock, and grain), 3. sale of core farm assets, and finally, 4. sale of land. You may be able to sell a small parcel or two and maintain a viable scale, which could be great news to a creditor. Also outline here any life, disability and income protection insurance policies you hold, as these are other important determinants in risk assessment.

Preparation is key. This may sound like a lot of preparation but it will reap significant rewards when negotiating with your creditor or potential creditor. Remember that the depth, detail and understanding demonstrated in the loan proposal document will reflect the character, attitudes and values of your farm business. It will show your ability and commitment to servicing the loan, repaying the capital, and generating a return on the creditor’s investment in your business. It will also directly influence the creditor’s perception of your professionalism, and hence the interest margin you pay.

It is important to be aware that banks and other creditors design new products every year so before your annual review, you should investigate the alternatives.

Upskill yourself

Until the drought breaks, undertake financial literacy and business planning training. It will give you greater control and leave your business better prepared for the next drought. Funding is available for vocational training, business planning and risk management skills development through the RAA’s Farm Business Skills Professional Development Program. Approved courses are subsided by 50% and could be the best use of your time until the rain starts to fall.

Help and further information

Drought loans and subsidies

Financial advice/guidance

Physical and mental wellbeing

  • Active Farmers - group fitness, nutrition and mindfulness programs through NSW
  • Beyond Blue -  if you really need someone to talk to, Beyond Blue are always there

Farm business management

The AgGuide - Business series published by the NSW Department of Primary Industries Tocal College includes:

  • Property planning
  • Business planning
  • Marketing agricultural products and services
  • Working with people in agriculture

View the TOCAL catalogue (PDF, 2148.08 KB)

Farm decision making checklist

Checklist If YES If NO

1. Are debt repayments a significant problem for me?

Proceed to 2.

NO —
Proceed to 3.

2. Can I reduce my debt repayments? Consider, for example:

  • seeking lower   interest rates
  • extending the   period of the loan
  • seeking an   interest-only loan
  • selling some   less-productive assets to repay some or all of the loan, e.g. the ‘back’   paddock
  • repay the   stock and station agent
  • machinery   that could be hired or contracted instead
  • livestock   that could be replaced by agisted stock.

Yes —
Proceed to 3.


3. Can we increase our family income? Consider, for example:

  • increasing   crop yield
  • increasing   crop area
  • increasing   livestock numbers
  • increasing   marketing percentages
  • increasing   growth rates
  • improving   product quality
  • improving   marketing
  • introducing   new enterprises
  • getting a job   off-farm
  • investing in   an off-farm business
  • contracting   or share farming

Proceed to 4.

NO —
Proceed to 4.

4. Can I reduce my costs? Consider, for example:

  • minimum   tillage
  • rationalising   your machinery
  • reducing   wastage at harvest and in storage
  • sharing your   machinery or specialised buildings with neighbours
  • sell   equipment under hire purchase or lease
  • using sires for   longer
  • reviewing   feed purchases
  • improving   fuel efficiency
  • reducing   hired labour
  • lowering your   expectations
  • altering your   lifestyle
  • reducing   personal costs

Prepare gross margins for the enterprises currently on the farm, and also look at other possible enterprises.

Proceed to 5.

NO —
Proceed to 5.

5. Can I now see any action that I can take to improve our situation?

Prepare a cash flow budget for the coming 12 months.

Proceed to 6.

NO —
Proceed to 6.

6. Will I now have enough cash to pay my bills as far as I can see into the future?

Proceed to 7.

NO —
Proceed to 8.

7. Will this new situation offer me and my family a satisfactory life? YES — STAY WITH IT!

8. It seems clear that I cannot continue to farm my own land. Can I see any other ways to continue to work on the land in a satisfying manner, apart from owning my own land? Consider, for example:

  • selling, and working for another farmer
  • selling, and leasing the farm land
  • selling, and leasing a more productive farm
  • selling livestock, crops and machinery, leasing the farm to someone else, and working for another farmer.

It’s a good idea to discuss your plan with your family, your creditor, your accountant and your solicitor to see if there are any hidden traps. If there are not, proceed as quickly as you can without unduly jeopardising the price you will receive for your land, crops, livestock and machinery.


The 2nd edition of Prime Fact 48 was supported by the NSW Department of Primary Industries’ Drought Recovery Project and the NSW Rural Assistance Authority.

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