Up, down, up, down, down, down & up. Farming is one of the most variable occupations in the world. Our profitability is determined by several factors including drought, pricing & government intervention. Australia is lucky to have access to farm management deposit (FMD) accounts to mitigate the impact of seasonal conditions. In this update we look at the state of FMD accounts at present during the drought.
This article won’t go into detail on the mechanism or how to best use an FMD, as we would expect the majority of our readers to be familiar with their use. However, at its most basic an FMD allows farmers to make deposits during profitable years and withdraw during the poor seasons. This also means that any tax payable is deferred until the withdrawal of the FMD, usually to a year with lower income.
In figure 1, the value held in FMD’s for the major states is displayed over the life of FMD’s to the last reported quarter (to June 2018). The value held in FMD’s across all states have been steadily increasing year on year since their inception. An interesting point to note about this chart is the ‘jagged’ form which it takes. The deposits increase during the quarter 2 prior to the new tax year followed by a consistent drawdown in quarter 3.
The last two months have seen a huge amount of delirium from politicians and the city centric media. We have seen it all, from the ‘parma for a farmer’, requests to seize export hay and compulsory consumer levies. As per usual, where large sums of money are involved we have already seen question marks raised in regards to some of the charities at the centre of this drought (see link), and the value of the drought handouts.
The best way to work through a drought, is to be well prepared for it. FMD’s are a valuable solution and one which is only available to farmers, no other business gets the opportunity to set aside profits and manage their tax in this way. As of the end of quarter 2, NSW has the highest value held in FMD’s, followed by QLD – both at record levels. Coincidently these are the states worst affected by the drought.
When the data is released for quarter 3, we would expect a large withdrawal of funds from FMD’s in this region, and I am sure the media will portray this as abnormal and further evidence of the seriousness of this drought. It is however important to note that seasonally there is always a drop-in deposit values from quarter 2 to 3. The only exception is in the first two years of the program, which can be explained by the holding period prior to drawdown.
The average quarter 3 withdrawal is 10% in NSW and 8% in QLD. It would be expected that during a drought the drawdown will be substantially higher, after all that is the purpose of the FMD program.
Prolonged droughts can be difficult to plan for, however the use of strategic risk management to secure grain and fodder, the early sell-down of livestock, and utilising tools such as FMD’s can limit the financial stress of a drought. The industry in general is keeping up and will survive this drought, however when the good times again return, there needs to be planning for the bad years which will inevitably occur again.