The farming industry always played an important role in Australia's economy and success. The farming industry is important to feed the population, but it also provides a lot of job opportunities. Almost 500,000 people are working in the farming sector and if we consider all those employed in the input and output sectors, food manufacturing and processing, distribution and retail, agriculture provides employment for more than 1.6 million Australians. Agriculture contributes around 2% of Australia's Gross Domestic Product and 15% of total Australian merchandise exports. In 2013-2014 the value of farm production was $51 billion. (Batt, Australia's ‘five strong pillar economy': agriculture, 2015)
Australia is known for its wide range of agricultural products. It produces wheat, wool, meat, dairy, cotton, wine, sugar, oilseeds, corn, vegetables and fruit. Therefore, it is able to supply different types of market demands. As an island with strong biosecurity regulations, Australia's agribusiness and food sector is known for clean, green and safe production. This makes that Australia is still free from many pests and diseases.
Australian farmers don't have to use certain antibiotics and pesticides which results in producing healthier and higher quality products.
Although the Australian farming industry knows many strengths, it also faces a lot of challenges. The largest barrier for farmers today are the rising costs of crop inputs. Inputs like seeds, fertilizer, chemicals and transport are a high burden in the costs.
According to M. Maley another challenge that farmers are facing are the terms of payment that Coles and Woolworths are handling. Coles and Woolworths together have an 80% market share and therefore dominate the market. Because of that they can decide when they are paying their suppliers, the farmers. Usually, Coles and Woolworths pay between 58-65 days for the produce delivered to their stores. Taking into consideration picking, packing, freight and quality inspection is also needed. This means that the farmer has to wait up to 90 days to get paid for their produce after already carrying the funding for crop inputs for a 90-day harvest period. (M. Maley, personal communication, 17 November 2016)
As a result, Australian farmers are experiencing problems with their available working capital, which results into cash-flow problems. Enough working capital ensures if a business organization has sufficient cash-flow in order to meet its short term obligations and operating expenses. (Investopedia, 2016)
Over the last 30 years the number of farmers dropped significantly. There are 40% less farmers than 30 years ago. For one part this is a result of technological development, but for another part this is unfortunately the result of financial problems that farmers are facing. (White, 2015)
In order to keep competing with the rest of the world and to maximize production, farmers have to invest in ways to improve their farming activities. Farmers need to work in a more intelligent way, using better resources and gain more knowledge. This is also called ‘Smart Farming'. For most farmers it means they need to invest capital. Most farmers already have outstanding debts with banks or have put their money in land, livestock, barns, equipment and real estate. This decreases their available working capital a lot.
4.1.1 Research purpose
Working capital is very important for a business. It's a measurement of a business' liquidity. It's the life blood and nerve centre of a business. In order to continue the production, it's important to manage the working capital very carefully. With good working capital management, a business can maintain a solid balance between growth, profitability and liquidity. (Riley, 2015) Working capital is calculated by a business' current assets minus their current liabilities. It's the capital that is available for there every day operations.
As farming businesses are facing an ever-changing global environment, the issues of maximizing cash generation, managing working capital and supporting the credit needs of the supplier base become more and more important in order to increase profitability and shareholder value. (Pwc, 2014)
In the past decades, banks have become extremely cautious with lending money to businesses that are facing more risk in general. The Australian Farm Industry is one of those risky industries. Growing commodities is not without risk. The land is exposed to weather conditions and relies for one part on the weather conditions too. Agricultural products also show a high price volatility. While the world still is recovering from the economic crisis, banks stopped providing capital the way they did before the economic crisis. Industries that are exposed to more risk than others are effected by that. They experience more trouble with getting access to sufficient capital.
For Australian farmers it is difficult to lend money from banks. Businesses are not able to lend money from banks as easy as they used to in the past anymore because of new restrictions.
As a result, alternative lending solutions are now offered. The Farmers Fund is a new concept that provides alternative lending solutions. The Farmers Fund focuses especially on the Australian farming industry. There are a few aspects which makes the Farmers Fund different than other lending solutions. A lot of banks don't have sufficient know-how about the farm industry and therefore are scared of lending money. The Farmers Fund has the expertise to understand how a farm business works and where the need for money comes from. The relationship between the Farmers Fund is much more personal. Because of the know-how from the Farmers Fund, they are able to provide more capital which makes it possible for farmers to invest more. If banks are lending money they tend to lend up to maximum 52% of the total value of the business, while the Farmers Fund looks for ways to maximize that loan up to 100%.
The goal of this research is to show where the urgency for funding comes from in the Australian Farming Industry and how this problem (for a part) can be solved. The Farmers Fund is a new concept of alternative funding and it is going to assist farmers in financial need by providing short term lending solutions which helps them to increase their productivity and profitability.
4.1.2 Key questions
In order to gain good insight into the problems Australian farmers are facing these days, a couple of sub questions will be researched in this report. The answers on the sub questions together will lead to the answer on the main question of this research.
The main question of this research is:
How can the Farmers Fund contribute to agricultural growth so the farming industry remains competitive?
In order to answer this main question, there are a number of sub-questions drawn.
• Which problems are Australian farmers facing?
• What is supply chain finance?
• What does the economic environment of the Farmers Fund look like?
• What is the Farmers Fund?
• How does the Farmers Fund work?
4.1.3 Research design
The research consists of desk research only. With the use of several different theoretical models specific information is being collected and analysed. Market research is a very broad approach of doing research, because the marketing environment of a business is very big. Especially the Australian Farming Industry has a significant meaning for the Australian economy. A majority of the Australian population is either direct or indirect involved with the Australian Farming Industry.
The Farmers Fund is a new concept, that's why for this report the choice was made to collect data by doing desk research only.
A lot of information about the Australian Farming Industry is available in existing reports and news articles on the internet. Some of the reports were bought in order to gain access to them. Those reports provided significant data that was of great value for this research.
4.1.4 Theoretical framework
In order to gain insight into answering the sub-questions and the main question of this research a couple of theories and models are being used.
The Farmers Fund is a whole new concept and with every new concept or business idea it's important to do market research. In the past there were many academics that have done research and created models and theories.
To launch a new concept a company needs to know in what kind of environment it will be launched. The economic environment of a product or business can be researched at three different levels, i.e. the micro-environment, the meso-environment and the macro-environment. There are several models available to support the research process and show which environmental aspects can influence a business' or product's strengths, weaknesses, opportunities and threats. Some of them are more influential than others.
The micro-environment shows internal factors. It shows small forces within the company and it shows the forces a business' management has power over. Every company knows different activities and/or departments in order to do business. Every decision that is made affects other activities and/or departments. Another aspect of the micro-environment is the customer market. It's important that a company constantly monitors customer behaviour in order to maintain successful and see where new opportunities arise and where other opportunities disappear. (LearnMarketing, 2016)
The DESTEP (or PESTLE) analysis shows all the aspects of the macro-environment of a business or product. This shows in what market a business is operating and refers to factors and forces that affect a business' ability to grow and maintain successful. The macro-environment includes external and uncontrollable factors that influence a business' decision making, and affect its performance and strategies. (Marketing-Insider, 2016)
The letters of DESTEP are describing the subjects being researched in the analysis. I.e. Demographic, Economic, Social/Cultural, Technological, Ecological/Environmental and Political/Judicial. The findings of this analysis will lead to the input for the SWOT-analysis. Michael E. Porter is one of the creators of the SWOT-analysis. He also created the five forces model which functions as input for the meso-environmental analysis. (MindTools, 2016)
The meso-environment of a business is the setting between macro and micro opportunities. There are many academics that have different theories about the meso-environment. For this research the report limits itself to the five forces model that was created by Michael E. Porter. The five forces model is a tool that shows where the power lies in a business situation. It will help understand the strength of a business' competitive position. Michael E. Porter provided a framework that models an industry as being influenced by five forces. For the strategic business manager, it is a helpful model that shows the rivalry within an industry. (QuickMBA, 2016)
According to Michael E. Porter the following five forces are influencing a business' rivalry. I.e. supplier power, threat of substitutes, threat of new entrants, buyer power and the degree of rivalry. All those aspects need to be taken into consideration in order to explore a business' strengths, opportunities, weaknesses and threats. This shows a business' competitive position in the market where it operates.
To explain how the Farmers Fund operates the theory of Supply Chain Finance is being used. Supply Chain Finance is a relatively new concept where lenders/banks/funders provide capital at specific moments in the supply chain where needed. By doing this it is possible to unlock capital which helps businesses become more profitable and makes it easier to do business. There are always moments where businesses have to wait for other links in the supply chain to pay invoices for goods of services that already have been delivered. This can create problems with available working capital.
The concept of Supply Chain Finance optimizes a business' cash flow by allowing businesses to lengthen their payment terms to their suppliers while providing the option for their suppliers to get paid early. This results in a win-win situation where the buyer optimizes his working capital and the supplier generates additional operating cash flow which leads to minimizing risk across the supply chain. (PrimeRevenue, 2016)
4.2 Research results
This paragraph will describe the analysis of this research.
The Australian Farming Industry is a major Industry with a significant meaning for the economy. The last years however, a numerous amount of farmers have had to abandon their (family) businesses.
This did not happen from one day to another, but during the years more farmers were facing more problems which got them into financial problems. One important source of income for farmers is missing in Australia. Compared to other countries in the world the Australian Government supports their farmers less than other governments in the world.
To do a proper research, first a research was done to some of the problems Australian farmers are facing in general.
A lot of problems Australian farmers are facing are a result of not having access to enough working capital. The purpose of this report is to explain the importance of alternative funding in the Australian farming industry and how alternative funding can help Australian farmers and farm businesses grow and remain competitive.
Secondly, the term ‘supply chain finance' is explained, how it works and how it can help farmers to produce more and become more productive again. Thirdly, a whole market analysis shows where the strengths, weaknesses, opportunities and threats are lying. Finally, the concept of the Farmers Fund is being explained and how it works.
The information is gathered from reports, news articles and documents online and it is all collected by doing desk research. With existing marketing models, the most significant information is selected and put in this report.
4.2.1 Which problems are Australian farmers facing?
The Australian farming industry is known for its wide range of products and for its strong biosecurity. Australian products are free from many pests and diseases because those pests and diseases don't exist in Australia. That makes Australian products very attractive to other countries and results in good export possibilities.
Unfortunately, the input costs farmers are facing are rising. They have to invest more money to produce the same amount of produce or they can produce less with the available capital to buy input. At the same time, farmers have to wait a long time before they see return on their investment. This together makes it harder for farmers to continue to produce and doing business.
Australian farmers are experiencing problems with their available working capital, which results into cash-flow problems. The cash-flow problems have a few underlying causes. Besides the rising input costs there is a lack of government funding. Compared to other countries globally, the Australian government does less agricultural funding. This means that farmers have to be more self-sufficient and be more profitable compared to farmers in other parts of the world.
Another reason for the financial problems farmers are facing is that Coles and Woolworths (the biggest supermarkets in Australia) have so much power that they can decide when they pay their suppliers, in this case the farmers.
M. Maley from the Farmers Fund says that Coles and Woolworths pay between 58-65 days for the produce after the produce is delivered to the stores. Before it ends up in the stores there is also picking, packing, freight, quality inspection needed. This means that the farmers have to wait up to 90 days to get paid for their produce after already carrying the funding for crop inputs for a 90-day harvest period. (M. Maley, personal communication, 17 November 2016)
This is a really long period and this causes farmers to face cash-flow problems. It also prevents them from growing into a bigger and more successful business.
To improve their liquidity, farmers have to look for ways to gain access to working capital. Banks are not always the solution for that. Banks typically provide a line of credit to the farmers based on the following: Say the farm is worth $10M (including land, improvements, etc.). The bank automatically deducts 20% off the value for the perceived risk, which means the loan is based over $8M. The bank then tends to lend up to 65% LVR (loan-to-value rate). So in the end the bank will only lend $5.2M over a value of $10M. In other words, the farmer only has 52% funding capacity in his farm to provide working capital. This means that the farmer is not farming his land to its full capacity. (M. Maley, personal communication, 17 November 2016)
M. Maley says the ‘Big 4' banks of Australia (Commonwealth, NAB, ANZ, Westpac) typically lend approximately 50-60% LVR of the farm and their assets, leaving most farmers restricted to much needed working capital. As a result of this potentially 40-50% of farms are being underutilised. (M. Maley, personal communication, 17 November 2016)
In 2015 Australia lost 25% of its small-scale vegetable farmers. Most of them were family farmers that were pushed off their land. (Louie, 2016)
In order to prevent losing more farms it's necessary that farmers are getting access to capital. The Farmers Fund is a new alternative lending concept that provides such solution.
For the Farmers Fund the report limits itself to the financial problems Australian farmers are facing, but it's important to note that there are more problems that Australian farmers are facing which makes doing business challenging. But those problems require more attention on a higher level which is out of reach for an everyday farmer.
Other problems the Farming Industry in Australia faces is the fact that the average age of farmers becomes higher. This is a threat for the continuation of some farm businesses. Another problem is a lack of proper infrastructure in Australia. This is something several governments in the different states are mainly responsible for. Although Australia knows a very rural landscape, it also has one of the highest urbanisation per capita rates in the world. The urbanisation growth rate continues to grow with approximately 1.1% per year. With the urbanisation also less people are choosing for an agricultural education. This automatically leads to a decrease in enough educated people to work in the Australian Farming Industry to fill in the gap that is to be expected in a few years. Finally, Australia knows a lot of different weather types and also faces extreme weather conditions sometimes. From heavy storms to extreme drought. This can put the harvest of many farmers at risk.
It's important to understand that there are more causes for the problems Australian farmers are facing, but a lot of them are not within the reach of farmers to change. (Quartapa, 2011)
4.2.2 What is supply chain finance?
A lot of value in supply chains stays locked during the process. That is a result of inefficiency and poor working capital management. A lot of value can be unlocked by the use of just-in-time finance, also known as supply chain finance.
Supply chain finance knows different types of financing. For the Farmers Fund this report limits itself to explaining Factoring and Reverse Factoring. These methods are the basis for the Crop- and Debtor funding solutions that the Farmers Fund offers.
To have sufficient Working Capital is very important for a business. It's the immediately available capital for doing day-to-day business. It is calculated by current asset minus current liabilities. On a business' balance sheet the accounts receivable is a major current asset and the accounts payable is a major current liability. Current assets and current liabilities represent property that can be converted into cash within one year. (Paychex, 2015)
Before a farmer can start planting new seeds, the farmer needs to buy the seeds, he also needs to buy fertilizer, plastic and other input. All those input costs show up at the accounts payable.
After the whole growing process and harvest, the produce will be sold. The farmer usually waits up to 90 days after harvesting to receive money for their produce. This will show up on the accounts receivable. This big financing gap has a negative influence on a business' working capital and their liquidity. A lot of value is locked in the supply chain.
There are ways to improve the available working capital with short-term credit lines. At both sides of the supply chain this is possible. When credit is provided at the accounts payables side it becomes easier for a business to buy more input and to produce more. Another advantage is that a discount can be negotiated for early payment. The business now has to repay a short-term loan for the bought input.
At the end of the growing process the farmer can sell their produce for approximately 4 times as much value as what it costs him. Because the farmer can buy more input at the beginning and produce more, his profit will rise too. A capital providing business that buys invoices can provide the farmer with its money and takes over the debt from the customer, for example Coles or Woolworths.
Because the increase of the accounts receivables is exponentially compared to the increase of the accounts payables, more working capital becomes available. A business is able to use this extra available working capital to invest in long term options. It can pay off debt or invest in more productive production methods or machinery.
In every supply chain there are four types of key participants: input suppliers, producers, aggregators and retailers/consumers. It's very important to map the interactions and relationships of the participants. Usually the participants already have pre-existing relationships. Analysing those pre-existing relationships and the interactions between them provide a lot of knowledge that form the first input that the financial institution needs in order to make decisions.
Once it's clear who the participants are, a credit application will take place. With the credit application the participants will be tested on their credit worthiness and a risk profile will be made. (Cuevas & Pagura, 2016)
In the farming industry input suppliers can be suppliers of seeds, fertilizer, agrochemicals, feed ingredients, feeder stock, medicines etc.
The input suppliers deliver their products to the producers (in this case the farmers) in order to help them producing/growing commodities. It's important that there is a good relationship between input supplier, producer and aggregator. If there is a good relationship between them, more and better information/data is available about the way they are working together. With that knowledge all participants can work more together, make better decisions, improve productivity and make income levels rise.
The aggregator is mostly seen as the anchor company in the chain. It's the point of contact between the financial institution and the value chain in total. (AgriFin, 2016)
The end-market participants are a very important link in the supply chain. It's important to constantly monitor the supply and demand coming from the market. Nowadays, consumer patterns are changing rapidly. With more possible choices to make and more information available for customers, customers' demand is changing more and faster than ever before.
Supply chain finance arises from supply chain management. A concept that exists a bit longer already. The basics of supply chain management are that participants within the chain can react faster on new events. Companies can reduce their stock and need less space to store their stock. This automatically results in a reduction of costs.
Supply chain finance is a method that provides funding at the right moments within the supply chain. Participants within the supply chain used to wait for a long period of time to get paid (i.e. 90 days), but with supply chain finance they receive their payment within 2 days. Because of that their available working capital improves and there is more capital available to invest to increase their production.
Factoring and Reverse Factoring
Reverse Factoring is not a loan, it's an extension of the buyer's accounts payable and is not considered financial debt. For the supplier, it represents a true sale on their receivables. (PrimeRevenue, 2016)
The supplier will receive their payment within 24 hours after the deal is set and that improves the suppliers' working capital. The buyer doesn't have to pay the supplier immediately so he will have access to capital for other investments.
Supply Chain Finance is a short-term credit that optimizes a business' working capital for both the buyer as the seller. Short-term credit is different than long-term credit and they work well next to each other.
Reverse Factoring is a payment solution that creates the win-win scenario that the supply chain needs. It's still a fairly new solution, but this method is proven to be an effective cash flow optimization tool. If a deal is well-designed amongst buyer, seller and financier, it provides advantages to all parties. It can also be used in different ways. For the Farmers Fund it means that farmers are able to use this way of payment for buying input like seedlings, fertilizer, livestock, antibiotics, etc.
When the farmer delivers their produce to their customers they also will send their invoice. Customers can take up to 90 days to pay those invoices after a period of the production process that already takes an average of 90 days. Because of this, farmers are experiencing a big financing gap that has a negative influence on their liquidity. A lot of capital gets stuck in the supply chain.
As a solution to this, there is invoice finance, also known as factoring. In this method the farmer sells his invoices to the factor (Farmers Fund). The Farmers Fund pays 80% of the value of those invoices in advance to the farmer. Hereby the farmer gets faster access to capital and can invest in new crops sooner in order to grow more. When the Farmers Fund gets paid from the retailer/wholesaler the farmer will receive the other 20% of the invoice value (minus fees and interest).
Crop- and Debtor finance both know risks. Lending money is never without risk. The farming industry is highly reliable on good weather conditions. In Australia the weather patterns are very extreme. They can show severe drought, heat, rain, wind and more. All types of weather that put harvests at risk. Unfortunately, that's a risk where farmers can't protect their crops from.
But there are risks that are manageable. For starters it's really important that all parties are being provided with good quality data. This means there is a need for good software programs that help monitor events and show real-time progress.
Before the Farmers Fund starts funding, a whole harvest plan will be set up. This is a forecasting model that shows within what time profit will be made and how much. Every week the farmer has to send an update of the actual status of the harvest in order to compare it with the forecasted data. Because this happens every week, risks will be reduced. If there are inconsistencies between the forecasted data and the actual data, corrections can be made quite fast in order to still meet goals that were set at the beginning of the whole process.
Another risk is the use (or a lack of use) of contracts. A lot of relationships in rural areas are formal. There is no descent documentation with clear agreements between parties available. It must be made clear in advance what is agreed between participants.
Businesses also experience market risk. Market risk exists because of price changes. The changes in prices of stocks, currencies and commodities are referred to as price volatility. For short periods of time it is somewhat possible to monitor fluctuations in the market and forecast changes. For the longer term it's impossible to forecast possible changes, because there are too many factors that can influence the market.
For the Farmers Fund it's important to take price and foreign exchange risks into account. One of the goals of the Farmers Fund is to expand their network and give farmers access to export markets in order to sell their produce to a bigger audience. Other countries use other currencies and the value of every currency can change from day to day. This automatically creates more risks when doing business. There are however possibilities to minimize this risk. Before doing business with a foreign country in a foreign currency there are a couple of things a company can do to minimize risk.
One of those financial instruments is a foreign currency exchange option. This gives the buyer of the option the possibility to buy or sell a specified currency at a specified exchange rate on or before a specified date. (AccountingTools, 2016) Another financial instrument companies can use to minimize exchange rate risk is a currency swap. (Beilke, Hauff, & Pluhar, 2006)
Supply Chain Finance is a relatively new way of providing funding to unlock more value from the supply chain. Still many businesses don't know the existence of this technique or how this technique can be valuable to them. In the future it is expected that more businesses are going to explore their possibilities with supply chain finance. It can be of great value for a lot of businesses and it can stimulate economic growth.
4.2.3 What does the economic environment of the Farmers Fund look like?
In order to get a good idea what the economic environment of the Farmers Fund looks like, all the aspects that influence the Farmers Fund are set apart in the following. This is researched with marketing analysis. The findings from this analysis result in a SWOT analysis which shows the strengths, weaknesses, opportunities and threats that the Farmers Fund faces.
The most important factors of the micro-environment of a business are the producers, customers, suppliers, public, marketing intermediaries and the workers and their union. These factors are the ones which a business' management can influence. (Nordmeyer, 2016)
The mission of Farmers Fund is very clear: Grow more, sell more. To achieve this, the
Farmers Fund offers solutions to farmers that gives them access to capital, information and a bigger/better network of suppliers and customers. Farmers are able to grow more, sell more, but also to make better deals which results into more profit. '
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