A Good Year on the Farm? Make Sure the Money Has a Job

For many farmers, the past couple of years have been a reminder of just how quickly fortunes can change. Costs went up, interest rates hurt, and in some sectors returns were disappointing. Now, things are looking considerably stronger.

8/19/20262 min read

MPI’s latest forecasts show strong returns across much of the primary sector, with dairy and red meat in particular benefiting from good commodity prices. Sheep and beef farm profitability is also forecast to improve significantly. When there is finally a bit more money in the bank, the temptation is to catch up on everything that has been put off. A new implement, more fertiliser, some fencing, repairs, debt repayment – the list usually isn’t short.

But a profitable year is also a good opportunity to stop and think about where that extra money will have the biggest impact on your farming business.

Profit doesn't necessarily mean spare cash. One of the biggest misunderstandings in farming businesses is the difference between profit and cash. You might have a good profit on paper, but that profit still needs to cover things such as tax, principal repayments on loans, drawings and capital purchases. By the time all of those are taken into account, there can be considerably less money available than the profit figure suggests.

Before committing to a large purchase, it is worth asking a simple question:
“If I spend this money, what does my bank account look like six months from now?”
That doesn't require a complicated 20-page budget. Even a basic cashflow forecast can give you a much clearer picture.

Make sure you give the money a job

Rather than simply spending because the money is available, think about what you want a good season to achieve. For one farm, reducing debt might be the priority. For another, it could be catching up on deferred maintenance, investing in pasture or infrastructure, or building up some cash reserves. There isn't one answer that suits every farm.

A useful approach is to divide available cash between three areas: strengthening the balance sheet, reinvesting in the farm, and keeping a buffer. That buffer is particularly important in farming. Weather, commodity prices and unexpected repairs don't tend to ask whether they fit into the budget. MPI is currently encouraging farmers to maintain realistic financial budgets and make early decisions as the country prepares for potential El Niño conditions.

Don't buy something just for the tax deduction

Tax should certainly be considered when making business decisions, but it shouldn't be the only reason for making them. Spending $100,000 to save some tax still means you have spent $100,000. If the investment improves production, reduces costs, saves labour or replaces something that genuinely needs replacing, it may make excellent business sense. The tax treatment is then an added consideration.

The better question is:
“Would I still want to make this investment if there wasn't a tax benefit?”
If the answer is no, it may be worth reconsidering.

Use the good years
Good farm business management isn't only about surviving the difficult years. It is also about making the most of the good ones. Strong returns provide an opportunity to strengthen the business so it is better prepared for whatever comes next.

Before the extra cash quietly disappears into farm spending, sit down and work out what you want this year’s profit to achieve. Sometimes the best investment isn't the newest piece of machinery in the shed, it’s putting the farm in a stronger financial position for the next five years.