Farm Management Deposits - a year round cashflow tool - 30 June 2005
Thursday, 30 June 2005
Farm Management Deposits are providing increased flexibility for farmers to deal with agriculture’s cyclical nature.
Farm Management Deposits, or FMDs as they are also known, are currently top of mind for many as we approach the end of the financial year.
“The highest proportion of deposits is generally made in June, while the majority of withdrawals occur during September - typically a high expense period for winter cereal growers,” notes Mike Carroll, General Manager of Agribusiness at the National Australia Bank (NAB).
“Given that deposits must remain in place for 12 months to receive the full taxation benefits, the gap between when deposits can be made and withdrawn dates can present a conundrum to primary producers,” Mr Carroll said today.
Where customers have some excess cashflow, NAB encourages them to deposit funds regularly during the year, so they have greater flexibility to make withdrawals when they really need them. “This can ultimately lower farm financing costs by reducing the burden of funding these costs through overdrafts until the FMD funds become available,” he said.
Mr Carroll added that farm management deposits can help deal with seasonal cash demands as well as tax planning. “Our research shows that, as well as the obvious benefits from a taxation perspective, customers with FMDs profit in a number of ways, and are a better risk proposition overall.
“Farm Management Deposits play an important role as part of an overall risk management strategy for Australian farmers. Since their release in 1999, Farm Management Deposits have allowed farmers to better manage the ups and downs of their business, smoothing out the cashflow variances that commonly occur with agriculture.”
There were 39,222 FMD holders with total holdings in excess of $2.2 billion, as at March 2005 and while the average size of each deposit has increased for existing users, fewer new deposits are being lodged. NAB Agribusiness, which holds a 20% share of the Farm Management Deposit market, has experienced a similar trend.
“This means that customers who utilise the FMDs can see the benefits to their business,” said Mr Carroll. “It’s now a matter of spreading the word to the remainder of the farming community, although the recent rain in many parts of the country has also limited farmers’ ability to use the scheme as they need the cashflow for planting and re-stocking.”
In the past 12 months the strongest percentage growth in deposits for National Agribusiness has been in Tasmania (22.8%), Queensland (12.9%), Victoria (11.9%), and Western Australia (6.4%), whereas New South Wales (-4.8%) and South Australia (-4.4%) have reduced their holdings.
This is reflects the parts of central and southern NSW experiencing consecutive dry seasons, and South Australia returning to normal production following an exceptional harvest in 2002.
“Our data suggests that regions which have been affected by poor seasonal conditions and commodity prices don’t have the immediate taxation need to utilise the deposits and are more likely to reinvest whatever surplus cash that is available back into their business,” he said. “Conversely, areas that have experienced more typical seasons have generated a profit and are using the deposits as a safety guard for times when additional cash may be required.”
Given that deposits must remain in place for 12 months to receive the full taxation benefits, the disjoint between deposit and withdrawal dates presents a conundrum to primary producers. The National Australia Bank encourages its customers to deposit funds regularly during the year, so they have greater flexibility to make withdrawals when they really need them. This can ultimately lower farm financing costs by reducing the burden of funding these costs through overdrafts until the FMD funds become available.
Case study
Sam and Anna Stranger, Minoru Partnership, run a mixed farming operation on 890 hectares near Canowindra in central west NSW with an enterprise mix of cereal cropping, prime lamb and wool production.
Sam first learnt about the Farm Management Deposit Scheme through his local National Australia Bank Agribusiness Manager and discussed their merits with his accountant.
He is now a firm believer, and says FMDs serve two distinct roles in his business – as a cash back-up in poor financial years, and to even out cashflow. “We had a good year in 2001 with strong wheat and canola harvests as well as high prices for our prime lambs. To reduce our tax bill we put some funds in FMDs and this has allowed us to top up income in the past three years when it suffered due to the drought.
“Most of our income comes late in the year, so our peak debt period is in the months leading up to harvest. We can withdraw what we need for this period, and then put it back when cash is more available in the same financial year,” he said. “Because of the 12-month lodgement requirement we have a number of separate deposits so we have some flexibility with withdrawals to make sure they remain tax effective.
“I believe FMDs are also a better tax management option than prepaying interest or buying fertiliser, because we generate an interest return and the cash is there when we need it. With the current drought in mind, I believe the FMD is the best financial incentive a government can give primary producers to prepare for a bad year,” Sam said.
Important Notice
Any advice contained in this article has been prepared without taking into account objectives, financial situation or needs. Before acting on any advice in this article, National Australia Bank Ltd recommends that you consider whether it is appropriate for your circumstances. The National recommends you consider the Product Disclosure Statement or other disclosure document, available from the National, before making any decisions regarding this product. This product is issued by National Australia Bank Ltd ABN 12 004 044 937. For further information call 13 10 12 for Business Accounts.
About NAB Agribusiness
The National Australia Bank (NAB) employs more than 550 agribusiness banking specialists at over 110 regional locations Australia wide. The Agribusiness team at the NAB is a leader in providing agribusiness banking services to Australian rural businesses, agriculture, forestry and fishing industries. It serves customers across Australia ranging from small family farming enterprises to large multinational operations.
For further media information, please contact:
Guy McKanna
NAB Australia Corporate Affairs
Tel: (02) 9966 3532
Mob: 0402 893 843
* The information contained in this media release is for media advice purposes only. The contents are true and correct at time of publishing/issuing, however may change over time. For further information about NAB products or rates, please go to Interest Rates, Fees & Charges
