Early warning signs for agribusiness operators on the road to economic recovery

This year has been dubbed as the start of a “multi-year rebuild” for Australia’s agribusiness sector as they recover from the prolonged drought, recent bushfires, major floods and now COVID-19.

Uncertainty about the impacts of the COVID-19 pandemic has initially taken the gloss off farmer confidence, however positive seasonal conditions and solid commodity prices in most sectors have fueled farmers’ optimism as the effects of drought subside.

Forecast crop and pasture production in Australia is expected to be above average into 2021 as key production areas have received beneficial rainfall. To take advantage of these favourable conditions, one of the key challenges will be access to working capital, to restock or replant.

However, the prolonged drought has caused rural debt to steadily increase, mainly due to rising operational expenses and limited-to-no operational income, eroding available equity. In these circumstances, farmers are encouraged to liaise with their financiers early as access to working capital funding may be challenging given current economic circumstances.

In addition, a global recession in the wake of COVID-19 is expected to result in reduced international demand and lower world prices for many agricultural commodities. Australia’s high reliance on export markets exposes agribusinesses to fluctuating global commodity prices, impacting financial performance and returns.

Whilst limited cash reserves, unpaid debts and adverse climatic factors are obvious lead indicators of agribusiness stress, we set out below some further indicators to be monitored by agribusiness operators and their stakeholders. Early action to address financial distress facilitates better planning, better outcomes and also helps agribusinesses meet their legal duties.

Early warning signs