The extremes Australia’s livestock markets are currently experiencing have been creating new opportunities, along with some additional challenges.
Producers are confronted with three types of decisions:
- To hold or sell growing stock in the face of extreme values not withstanding an abundance of grass.
- To make longer term capital decisions to re-invest in breeding stock.
- To adopt a focused trading enterprise.
Each of these decisions are the subject of a separate conversation. This discussion is about accessing a dedicated finance facility for the specific purpose of funding livestock transactions.
5 years ago the funding requirement for 500 steers might have been $260k, today that funding requirement may well be in the order of $500K.
The major banks have recognised there is a financing requirement and have begun developing guidelines to support their customer’s activities. In turn, here are some suggestions as to how a producer might successfully negotiate a working capital agreement. Typically, a lending proposition requiring a limit extension will also examine processes to manage and report livestock positions.
1. Stockflows / Trading Accounts
A stockflow simply records opening numbers by age class, purchases, natural increase, sales, deaths and closing numbers. It both reports and predicts inventory movement and brings a connection between the underlying profitability of an enterprise and cashflow.
The trading accounts are arguably the most significant component of a livestock financial management process. Significant management decisions will be reflected through the trading accounts.
2. Inventory reporting
An assessment of a lending application will ask what processes are in place to report number, current market values, and how many are on hand, by weight, and weight gain. Any of the individual animal management platforms will provide the required insights into animal performance and deliver the required reporting.
Typically, a cattle trade can be between180 to 270 days, generally the rule of thumb is finance short term trades with short term funding, in this case there are pitfalls to purchasing females with the ambition to rebuild the herd and finance that purchase with a short-term agreement. If rebuilding after the drought is the intent, a longer-term finance agreement may be appropriate.
4. Know thy numbers
Financing livestock purchases at current levels is an elevated risk, it doesn’t mean that the risk shouldn’t be taken. It means that a more robust process to assess that risk is required. Assessing a potential trade in terms of return per Adult equivalent and / or profit $ per head / day.
Devise the plan, present the argument highlighting the risks, the tolerance to adverse movements, monitor and revise the position, and keep stakeholders informed.