Agribusinesses brace for looming drought, lenders report

The Australian Bureau of Agricultural and Resource Economics and Sciences (ABARES) has modelled the impact of climate changes from 2001–20, showing a 23 per cent decrease in annual average farm profits, approximately $29,200 per farm, compared to the two preceding decades.

Despite these challenging times, Australian farmers have recently enjoyed the benefits of favorable commodity prices and seasonal conditions, resulting in many achieving record-breaking production in 2022.

Business development & strategic partnerships manager David Thorn at non-bank lender Banjo, acknowledged that rainfall patterns in 2022 were favorable for cropping and growing, prompting diligent business owners to reduce their debt well in advance.

However, he noted that lending requests vary depending on the borrower’s region and commodity.

In particular, livestock producers nationwide are currently grappling with lower beef, lamb, and wool prices year on year, exacerbated by drier conditions in Queensland and northern NSW with minimal winter rainfall this year.

Mr Thorn warned that these conditions could deplete cash reserves rapidly in those regions, leading to increased demand for lender support.

In contrast, southern NSW, Victoria, South Australia, and Western Australia’s cereal grain producers seem to have a robust subsoil moisture base and this year’s winter crop appears promising.

Despite grain prices being down 15–20 per cent year on year, he noted many agribusinesses should see acceptable cash inflows from the upcoming harvest.

In addition, opportunities for securing working capital and equipment finance remain readily accessible, explained Mr Thorn.

Instant asset write-off

The instant asset write-off scheme that experienced a surge in asset finance during COVID-19 when the government raised the write-off threshold to $150,000 to support businesses is supporting many businesses today.

Although the threshold has been lowered to $20,000, Banjo continues to witness strong levels of financing for new and used equipment.

“In the lead-up to 30 June 2023, numerous borrowers took full advantage of the ‘instant asset write-off’ tax legislation. This was particularly relevant to equipment finance,” Mr Thorn said.

This allowed agribusinesses to expedite tax benefits by financing recently acquired equipment, freeing up cash inflows for other business needs, he explained.

“Our broker referral partners remain acutely aware of the cash flow benefits equipment financing brings to an agribusiness,” Mr Thorn said.

While accumulating new equipment and reducing existing debt during good times are advantageous strategies, diversification by commodity and region, as observed by Mr Thorn, is the most effective way for agribusiness owners to mitigate the impact of El Niño and other weather phenomena.

“In our experience, clients have tended to be reactive rather than proactive when if comes to weather events so we may see this play out as the summer develops and rain stays away,” Mr Thorn said.

In addition, the non-bank lender is keeping a close eye on small businesses, such as garden supplies, swimming pool-related businesses, and nurseries, to ensure support is at the ready if climate impacts are being felt.

“Obviously bushfires as a result of El Niño will have a flow-on effect as well,” Mr Thorn said.

Despite this, SMEs continue to expand their businesses, with a 28 per cent increase in lending in the financial year 2023, as reported by the Australian Banking Association (ABA).

BOQ head of agribusiness Simon Davis weighed in that many customers at risk of reduced income due to El Niño and potential drought conditions are actively seeking to secure sufficient cash reserves or working capital buffers to sustain their businesses through the cycle.

“Customers who are at risk of lower income due to the El Niño and potential drought conditions are typically looking to ensure that they have either sufficient cash reserves or working capital buffer to support their business through the cycle,” Mr Davis said.

“Where there is a broker relationship, they play an important role in initiating and supporting mutual customers with these conversations.”

[Related: Reaping the benefits of agrifinance]