"Changes in weather patterns impact production decisions and methods. The fair amount of unpredictability before and even through a production season impacts production and ultimately financial risk," says Standard Bank Head of Agribusiness, Nico Groenewald. "As a result, you need to accord the weather a metaphorical place on the balance sheet and in income statements when you're doing your planning.
"This will enable you to understand what the financial impact of a drought could be on your production for any given crop or type of livestock - and will make you much more agile in adjusting your operations should the weather turn against you."
Groenewald says that a critical aspect of agility is being able to renegotiate repayments on production loans or other debt in time for your bank to offer as favourable an arrangement for you as possible.
"Trying to reschedule your debt at the last minute puts your bank in a very difficult position. Trying to reschedule it after you have actually defaulted on a payment gives you even less leeway for maintaining cash flow.
"Fortunately, there are a number of strategies you can use to avoid getting into such a situation, even if you're confronting a drought for which you hadn't planned. Because drought has different implications for each stage of production, your choice of strategy will be dictated by where in the production cycle you are."
If your crop looks like it will either not be of the right quality or the harvest will be too small, then converting that crop into livestock feed may substantially reduce losses. Conversely, if prices are so good that relatively small harvest will bring in more money than converting to livestock feed, it may be worth waiting out the drought.
"It's very difficult to make decisions like these without doing an objective analysis of the impact of the drought on your particular operation and relating the analysis back to your income statement as it relates to cash flow," says Groenewald. "Agricultural economists at banks can often help to bring a greater degree of objectivity to your analysis and also have tools to make the calculations a little easier. It pays to ask for their help and to do so as early as possible in your deliberations, so that you have time to change your operations to your advantage."
An analysis of your income statement will give you an idea of when cash flow will become an issue and enable your bank to make sensible recommendations regarding your debt repayments. This might include consolidating your debt.
Analysis will also indicate whether or not it is worth channeling existing funds into other parts of your operations that are not as severely affected by the drought.
"Cash flow is tight on most farms," says Groenewald. "So this might not be a significant option right now. But it is a strong indicator that diversifying one's operations in future could be a powerful drought mitigation strategy. For that reason, diversification may be well worth including in your planning for the next 12 to 18 months.
"It will also give your bank the comfort of knowing that you have options that will help you recover your financial position in the reasonably near future."
Costs are another element of the income statement that offer mitigation during a drought. Many costs that seem acceptable when things are going well can be eradicated with relative ease when the pressure is on - freeing up cash flow.
The next step is re-examining the assets and liabilities on your balance sheet.
"Most operations have some 'lazy' or downright unproductive assets," says Groenewald. "Selling them can be a fast way to regain liquidity.
"On the other side of the balance sheet, your most significant liabilities are likely to be some form of debt. Renegotiation of that debt or its terms might be necessary. But, in that process, it's worth assessing whether or not the crop or operation for which you have incurred the debt remains a paying proposition. This is not a question of diversification, which implies maintaining your original crop while expanding into others. It's a question of whether climate change has now made it imperative to scrap this crop altogether in favour of ones that are more adaptable to variable weather or, perhaps, to the drier or wetter conditions your farm is now experiencing.
"In other words, while the drought may be stretching you financially and emotionally, it does represent an opportunity to make your operations even more efficient and agile so that future droughts will simply be one production factor among many rather than an overwhelming disruption."
