FARMS UNDER FINANCIAL PRESSURE
The extent of farm financial difficulty that has been confirmed in the ABARE broadacre farm surveys and it is expected to continue into the immediate future. A number of farms are forced to:
roll over interest payments
use off farm income to meet these payments.
For the most part, these farms can be identified as farms which are under some pressure to reduce their capital base. These farms, in particular, need better analysis of present financial position to aid management strategy selection.
There is need for a set of farm business performance indicators to aid the categorization of farm business position and the diagnosis of farmers' adjustment needs. For farmers, bankers and others the use of these indicators should enable a firm grasp of the farm's position, and the selection of appropriate farm management strategies by farmers in consultation with their credit providers.
Calculating a range of performance indicators is the basis for an objective diagnosis of the farm's strengths, weaknesses and overall position. In turn, this enables a realistic assessment of adjustment options for the farm and the family.
Financial stress arises when market forces drive farm income or profits below their normal levels. However, the critical factor in determining whether the farm experiences such stress is its capacity to adjust to adverse economic events. When the farm system cannot adjust to such external stimuli, financial stress occurs.
The financial health of a farm business can be assessed by examining a number of measures including liquidity, solvency and profitability. However, no single measure is entirely satisfactory in its ability to indicate a firm's vulnerability to financial stress. Therefore, a number of measures are required.
THE NEED FOR BETTER SKILL IN FARM FINANCIAL MANAGEMENT
It is now well recognised that the modern farmer requires a higher level of financial and economic skills above that of farmers a generation before. This can be achieved with better education and support groups. There is also evidence of higher risk for farmers who become involved in the export market for example, caused by the floating dollar:
....."the greater variability in the exchange rate since the floating of the Australian dollar has increased uncertainty in both the rural sector and financial institutions. This means that greater reliance will be placed on the financial management skills of farmers. For example, during the mid 1 980's higher interest rates were transmitted rapidly through the economy giving borrowers little time to attempt to reduce indebtedness. Such risks need to be taken into account when determining debt levels and the type of debt in the future." (Peterson et al, 1991).
Further, the Committee of Enquiry into Banking and Deregulation [Martin et al, 1991] made the following pertinent comments:
“Variation in interest rate and bank margin policies has placed a greater burden on borrowers in the rural sector [16.34, p.275]."
".....complaints were made that banks sometimes change loan arrangements including the altering of fee structures and interest rates with little or no advice to customers [16.37, p.276]."
"Evidence indicates that banks have failed to provide simplicity and transparency in documentation. Communication between banks and rural borrowers is still insufficient [16.39, p.276]."
"Whilst the majority of rural producers have financial expertise and knowledge, some farmers often do not have the expertise to understand intricate financial detail. They have tended to take banks on "trust". This "bush culture" places them in a vulnerable position in negotiating financial matters. Even in the deregulated market, farmers have continued to take banks on trust. In addition, as the NFF has argued, the implication is that advice is offered in the farmer's best interests which must also conflict with an aggressive lending policy[16.40,p.276]."
".......due to the trust held in banks, some farmers did not seek additional advice from solicitors, accountants, rural counsellors or other relevant professionals about their finances. While this is now changing, farm organisations should encourage farmers to seek opinions from other financial advisers [16.43, p.277]."