Economics is characterised by irrational exuberance in an upswing and irrational pessimism in a downturn, something which farmers, more than other businessmen need to be especially wary of. Just how quickly the tables can turn was starkly illustrated last year when a record yield and a drought cycle were recorded in single 12-month period.
Looking at protecting one’s finances is therefore critical, even in times when a good harvest is forecast.
With working capital likely to come under pressure as a result of the recent drought, farmers should think carefully about cutting costs. While anything resembling excess fat certainly needs to be trimmed off, farmers should not try to save to the extent that it leads to lower crop yields. For maize farmers, one of the most important calculations is the storage of corn if the price is not quite right, and whether this can be achieved commercially or on the farm. This calculation has to take into account the working capital that may not be available if maize is held back.
Grain storage is certainly one of the most important financial calculations a farmer can make. Storage is often costly, and a better price in future is not always guaranteed. The longer one waits, the more likely you are to have to sell when working capital becomes tight, instead of selling on your own terms. Therefore, these difficult decisions need to be made at the start of the season, to avoid emotional choices later down the line that gamble with the future of the farm.
On the topic of gambling, farmers should also not expect the maize price to improve exponentially, unless yields are poor across the world. If there is a good price on offer, it may be a good time to lock in that price, at least for a portion of the yield.
Depending on how government views the drought, there may also be financial relief for farmers. If this is the case, farmers need to find out early whether they qualify, as many who experienced failed crops may be indebted and struggle to secure bank finance.