Don't Climb the Mountain. Use the tunnel!

With the recent announcement of a payout drop, it seems that farmers have to bite the bullet to keep Fonterra viable. If that sounds familiar, it's because we've been hear before.

Cast your mind back to May 2008, the season where Fonterra announced their payout to Farmers at 7.50/kgms. Back then, a farmer could bank on that payout which enabled him to make plans and commit the coming cash surplus to projects and investments.

Then in November that same year, Fonterra took back $2/kgms, leaving an adjusted payout of $5.50/kgms. Why? Because their financial position didn't look too good. That 27% drop in income forced farmers to go to their banks to finance the projects they had committed to just a few months earlier.

Thanks Fonterra.

The effects of that 27% financial back-track is still showing in farming balance sheets today. My own farming enterprise suffered a $400,000 hit that season.

But there were other challenges that year. The housing and sharemarket crash and the drought of 2008 combined with the payout drop to form a perfect storm. Many progressive farmers got hammered and were made to look naive and reckless in front of their bank managers.

That experience changed everything for me. I began to trust outside institutions less (like Banks and Fonterra).

Believing that Fonterra would turn farmers into peasants, I began formulating my farming exit strategy. We started selling off non-income-producing assets, which included two lifestyle blocks. One of these properties was our pride and joy home of ten years. The other was a new lifestyle block next door. In a falling market, dropping these very personal assets was a scary thing to do.

Armed with expert advice, we foresaw the coming market fall and sold two months ahead of the crash. This grabbed the attention of interested parties who thought they were getting a bargain. Selling in a lower market isn't easy to do. But if you think selling at a reduced price is a bad idea, try calculating the interest payments over the next nine months; you might see that selling at a lower price is a better option than keeping it.

Of course after selling, the market kept dropping which made us thankful for our decisions. Within 6 months we then began our exit strategy which ended in the family farm being sold at the peak of the market in June 2014.

Having been through this experience, what advice would I now give to people in this very daunting position? I would say: Go into survival mode. To get through this, you cannot afford to be emotional about your position or the assets you have accumulated. In this fight for survival, here are your best weapons:

1.Get the best advise and support you can – from your partner, your family, and your friends. Make use of older farmers, even retired ones. They've survived tough times before and know what it takes to come out the other side.

2.Seek people outside the bank to help with cashflow and verifying your real position. Remember, banks will protect their assets first, which is the money they have loaned you. That means their interests and ideas may conflict with yours. Use an independent financial person; make them part of your survival team.

So eight years later, the bad cycle is back. If Sue and I had stayed in, milking our 500 cows, it would be like climbing a mountain that has no peak, no end in sight.

But we didn't climb. Some journeys just aren't worth travelling.

I'm on a better path now and enjoying it. But here's the thing; when I left the farm, I had no map with me. I wasn't certain about where I was going or how things would turn out. We just made the best decisions we could and made it through.

If you think it would help, don't hesitate to ring me for a talk. I have been where you are and I can tell you there is a way through. Maybe it's taking the tunnel instead of climbing that mountain!

David Law


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