Drought Bulletin

There’s no denying it’s been tough times over the past few months for our agricultural sector dealing with, what some are saying is, Hawke’s Bay’s worst drought in decades.  Coupled with other regions also affected by a drought and the restrictions imposed by a lockdown, it’s been the perfect storm.

This time last year many districts around the Bay were in another autumn drought, M. Bovis testing was in full swing, and since then TB cases have popped up causing great concern. However, there have been glimmers of hope at different times, with strong schedule prices producing record stock prices which have helped insulate the effects of past challenges. Not so, in the past couple of months.

It’s been particularly heart-warming to see the Hawke’s Bay Drought Facebook page setup by Poppy Renton to provide much needed support and connections when the plight of the Hawke’s Bay farmer was seemingly not featuring in the news or the Government assistance packages. Of particular note, were the offers of support, assistance and connecting suppliers of supplementary feed with those in need. In recent days MPI has taken over the management of supplementary feed, matching supply with demand. You can now direct all queries on supply and demand for supplementary feed to mpifeed@gmail.com

If you need help with your feed budgets, then Beef + Lamb NZ can assist (0800 233 352).

Lately there have been volumes of information on COVID-19 coming through, yet relatively few announcements recently on Government assistance for farmers affected by the drought.  This is no surprise given the Government first must be seen to support those with very few assets and limited incomes and they cannot provide you what’s ultimately needed – rain!

The drought assistance options that were announced, many are saying, totally missed the spot. Again, no surprise as understandably they first must attend to those people that are most vulnerable, ie; those in hardship situations or struggling with mental health issues.  And typically, we don’t see measures beyond helping that limited pool of persons for fear of an uproar by their voting base.

So that begs the question, what help is out there for the majority of farmers who are expected to take it on the chin, knuckle down and carry on?

The answer is not much financial help, certainly not enough to fill the financial hole you are experiencing, but there are some bits and pieces that may help which I will summarise below.

You will notice that for those financial measures that have been announced, what has been lacking is the practical application of this information to see if it’s actually of any assistance. Due to the lack of clarity, we have been taking a watching brief over the last few weeks to see if more guidance would be issued and also to see what responses many are taking. It’s fair to say, in many respects, everyone has been interpreting the rules their own way to suit their own circumstances. Not helped, when some of the rules are poorly drafted. Having said this, I will attempt to shed some light on the choices that lay ahead and that may be of use to you. This commentary is my general observations and thoughts based on the rules as at 13 May 2020. Rules are subject to change so please seek specific advice for your situation.

 

WAGE SUBSIDY

Later in this bulletin you will read the rules about the wage subsidy and what you need to do to apply. This is a self-governed application based on trust. Apart from checking that you are in business and/or you have employees, MSD do not assess if you meet the qualifying criteria and “grant” you the subsidy. Rather, the applicant makes their own warranties that they meet the criteria and then receive the money, often without questioning. The receipt of such money therefore doesn’t mean that they accept that you qualify. That’s something you may have to prove at a later date, so be certain you have your qualifying criteria sorted.

The rules have been written poorly and everyone has been struggling to understand how the intent of the rules apply to farming businesses.  I am the first to admit I don’t have all the answers either because they were never written to apply to a farming business with seasonal incomes. I will say that farmers aren’t excluded from making the claim. We are seeing a wide range of organisations making claims – from large meat companies to charitable organisations to private schools, so it’s not just your small to medium owner/operator. No further guidance has been received from the Ministry over farmer applicability, so we can assume if the farmer meets the test, they can potentially apply.

There are two different approaches you can take to this and from there come up with your own call on whether you do or don’t claim the wage subsidy. Just be prepared to explain your decision if you do claim it.

 

The literal interpretation

The rules are pretty simple, and I abbreviate them here so refer to the full detail later in this bulletin. Pick a month or a 30-day period between January 2020 and 9 June 2020 and show a greater than 30% reduction in revenue compared to the same period last year and show how you can attribute that reduction to COVID-19.  On the face of it most farmers will be able to find a period where the financial result box is ticked. It might be more difficult to prove it was a result of COVID-19 although I have noticed some farmers are connecting a lot of dots to blame COVID-19. For those that can show an organised event such as an annual stock sale (e.g.: weaner fair) didn’t go ahead due to COVID-19, their case will be strong. For those that are simply suggesting they would have sold stock had the sale yards or works been operating to full capacity, their case will not be as strong, especially if they sell those stock in the following month for similar money. If they sell the stock in a later month and they receive 30% less for it, then their case is strong.

As farmers are likely to be audited by MSD and asked to prove the COVID-19 reasons, it is important that they evidence the revenue reduction as much as possible by having:

• Revised budgets showing the implications versus the original forecast.
• Supporting information from stock agents or processors validating numbers of stock that a client has been unable to sell and would reasonably expected to have sold.
• Any other key pieces of information that would further support an application.

The incurring of additional costs (such as supplementary feed to winter those stock retained) is of no relevance to the qualifying criteria. It only refers to a revenue reduction, not a profit reduction.

For any farming business which has only commenced this year, they need to show the revenue reduction as compared to a prior month. Again, meeting this test in a literal sense could be possible but I think their case is very weak.

If you are going to make the claim, I encourage you to talk about it with your accountant but keep in mind they are dealing with the same information you are, so cannot give 100% assurance as to the validity of your application.

 

The moral interpretation

Under this interpretation, farmers would rarely qualify for the subsidy. If you think of the intent of the subsidy which was to save jobs for those businesses who either couldn’t operate or whose profits were severely impacted, meaning that they may have had to commence redundancy processes, then you will realise it doesn’t apply to farmers whose businesses continued to operate.

Alternatively, you might think the intent was to pump money into the economy with no targeted approach and so you are entitled to apply if you meet the literal test.

We have seen examples in the media where businesses which didn’t need the subsidy but likely qualified for it, have been morally exposed by the media and for fear of retribution, paid the subsidy back. The Minister of Finance is well aware there are businesses that qualified for the subsidy but didn’t need it, and as such, will likely profit from the scheme.  His comments were that he hoped they would “do the right thing and pay the subsidy back”. A clear signal that legally he thinks they are entitled to keep it but should consider their moral stance.

So, in short, there is no clear answer, but if you do intend to claim it make sure you have clear evidence to support your claim and can show that COVID-19 has directly caused your reduction in income.

Federated Farmers have this to say on the matter:

“The government’s COVID-19 financial support schemes are open for farmers to apply to, provided you meet the criteria. While the application process itself may seem fairly straightforward with limited requirements, the government is retrospectively auditing samples of those who had applied for and been paid these support schemes.

Farmers running tourism-related businesses should seek advice from your accountant on how losses may be attributed to that business and reflected in any application and funding.
Clearly, some farming operations  have been impacted by COVID-19, drought, reduced meat processing capacity and lack of available feed, and this may take some sorting out. For that reason, we strongly recommend you talk to your accountant before applying. A summary of both the wage subsidy and leave support schemes, and other components of the support package, is available on our website at this link.”

 

INTEREST FREE LOAN SCHEME

The eligibility criteria for this is the same as the Wage Subsidy. So presumably, if you can meet the literal test, then you can apply for this loan scheme provided you meet the criteria plus declare that you are a viable business.  You will need to enter into a legally binding loan contract. For many “Mum & Dad” farmers, they will be limited to less than $15,000 of loan support. And if they pay back the loan within a year, they will have likely saved themselves interest of somewhere between $500 to $750. Hardly worth all the hassle I would have thought. It’s clear this scheme was intended to inject cashflow into businesses who are struggling to pay immediate bills. I see limited applicability or benefit to farmers.

 

BUSINESS FINANCE GUARANTEE LOAN SCHEME

Initially farmers were excluded from this scheme, then Federated Farmers questioned the Government and have had that stance reversed.

Again, I see limited applicability to farmers because you can only apply to help fund normal business operating costs if your business cashflow has been impacted by COVID-19. There may be circumstances where you are required to winter stock that you would normally have sold and may incur costs to do so, for which a special rate interest loan could be of benefit.

Generally, it can’t be used for refinancing existing loans, or asset purchases. In fact, there’s a long list of rules relating to this scheme, so I recommend you read the list then approach your bank.  Find out what your bank’s take on the rules are, how they are applying them to the scheme and what security they will require.

There’s a very good summary of the scheme here: https://www.business.govt.nz/covid-19/business-finance-guarantee-scheme/

 

DROUGHT ASSISTANCE

As mentioned earlier, the financial help offered here is minimal so there are no easy cash gold nuggets here.

 

2020 Drought Recovery Advice Fund

The rules for this are mentioned later in this bulletin as are the potential uses for this fund. Of all the Government initiatives, this one is worth considering but there is only a small window to take advantage of it. Our recommendation is that all our farming clients should apply. The fund is limited so we suggest you act now.

With the adverse impact of the drought, everyone should be undertaking cashflow forecasts which will help you to make better decisions and give you peace of mind because you will understand where your business is heading.

We will then be able to use these forecasts to help decide if you should be taking advantage of the Income Equalisation Scheme, to generate tax savings. We will also be able to use the forecast to calculate what provisional tax to pay for the coming year. Most farmers are coming off the back of a relatively good year and so their provisional tax obligations will be large. If you want to reduce this, then the forecast will help determine what reduced amount of tax to pay.

Although the grant is capped at $5,000 per applicant, the potential cashflow savings of reduced tax could be many tens of thousands of dollars. We are highly capable of completing cashflow forecasts in your software, as this is something that we do all year round.  You will also be able to use that forecast to measure your actual performance against budget for the coming year.  To apply, follow the prompts at https://www.mpi.govt.nz/protection-and-response/responding/adverse-events/support-during-a-drought/2020-drought-recovery-advice-fund/

 

Rural Support Trust

Their website contains a whole host of support and we recommend you take five minutes to look through the advice. http://www.rural-support.org.nz/events

Traditionally the Trust was mainly concerned about mental health, which they still are, but additionally they are a very good source of information for farming businesses affected by the drought.

 

Rural Assistance Payments

Work & Income manage this scheme and you can view the criteria here:

https://www.workandincome.govt.nz/products/a-z-benefits/rural-assistance.html

Although I am sure they intended to help farmers, I see limited applicability when one of the qualifying criteria is:

Asset limits

To get this payment, any cash or off-farm assets you have must be under a certain amount. This doesn’t include farm or orchard assets, such as shares in dairy, meat or fertiliser companies.

If you are:	Your assets must be less than:
single	$1,113.36
a couple (with or without children) or a sole parent	$1,855.15

 

Any farmer who is still in business is sure to have assets, outside their farming business, of more than a couple of thousand dollars. In reality it’s hard to see any farmer ever being able to meet these criteria and therefore receiving this financial support.

 

IRD Support

The IRD have offered very little immediate help but there are two main schemes worth mentioning:

Remission of interest and penalties

If you are unable to pay your taxes due to the effects of COVID-19, then they will remit interest and late payment penalties. Note that the tax is still payable! Most farmers will struggle to show that COVID-19 is the cause of not paying tax on time and most would rather just pay the tax knowing it’s due anyway.

Income Equalisation Scheme

This is potentially the only nugget offered up and it could be of real benefit. Allowing late deposits and early withdrawals into the scheme means you can essentially switch income between three tax years (2019, 2020 and 2021), possibly incur a lower tax rate and you won’t need to leave the funds with the IRD for the full year. Potentially by the time you make the deposit, then request a refund of the deposit, the money will be out of your bank account for no more than three weeks. In practice we have used such a scheme in the past to save or defer several thousand dollars in tax for farmers.

 

MPI Support

MPI have put together a very comprehensive list of help that’s available and you can view this here: https://www.mpi.govt.nz/protection-and-response/responding/adverse-events/support-during-a-drought/

 

Beef + Lamb Support

Beef + Lamb have plenty of ideas and support located in their knowledge hub here: https://beeflambnz.com/knowledge-hub

There are also some useful podcasts about how to manage the drought.

TAKE TIME OUT

The barrage of events over the past year continues to test the resilience of our Hawke’s Bay farmers. But true to form they have banded together for support and to help each other get through. Never has there been a more important time to have a strong network of friends and family willing to listen and empathise, and never has there been a more important time to get off the farm for time out. When you live in your business 24/7 it’s vital to get off the farm and do something completely different to give your mind a rest and clear the head. Although you will want to stay and fight the battle, because that’s your nature, that will not keep the mind in good health. So, I encourage you to do what needs to be done to enable you to take a break for a few days out of the district, now the lockdown rules are being eased. Call on your employees, neighbours, friends or family to cover for a few days and return the favour for them. You will return with a better perspective of your situation and feel more in control, enabling you to make the decisions that need to be made.

END OF COMMENTARY

 

 

Key information about the Wage Subsidy:

• You must be a New Zealand business
• Your employees must be legally working in New Zealand
• Your business must have experienced a minimum 30% decline in actual or predicted revenue in any one month between January 2020 to 9 June 2020, compared to the same month last year
• You have taken active steps to mitigate the impact of COVID-19 on your business (including but not limited to engaging with your bank, drawing on your cash reserves as appropriate, making an insurance claim)
• You need to retain the employees named in your application as your employees for at least the duration of the subsidy (12 weeks)
• You will use your best endeavours to pay at least 80 per cent of each named employee’s ordinary wages or salary or as a minimum pay at least the full amount of the subsidy to your employees.

 

For more information  https://www.workandincome.govt.nz/covid-19/wage-subsidy/who-can-get-it.html

 

Key information about the 2020 Drought Fund:

• The farm must be in a 2020 drought-affected region or District (Hawke’s Bay).
• The farming business must have been negatively affected by the 2020 drought.
• At least 50% of the farmer’s income, in a normal year, must be earned from the farming business.

The fund provides farmers with a maximum of $5,000 to be spent on drought recovery advice, both business and technical.  Types of services include:

• stock water best practice
• feed management systems
• strategic planning, including farm business and whole farm plans
• land management and sustainable management techniques
• analysis of farm systems
• risk and recovery management
• business continuity
• modelling farm systems change scenarios
• alternate land-use options
• technical advice on soil, pastures, or animal production
• financial planning and decision support
• farm accounts analysis

 

Applications must be completed by 12 June 2020, then on 22 June successful applicants will be given instructions on how to proceed with their preferred supplier.  You do not have to specify a preferred supplier at the time of your application.

The services provided under this grant fund need to be used and invoiced by June 2021.

 

As always, our Farming Growth team are here to support you, and particularly now through this drought.  Some services that we can provide which may assist at this time are accounts analysis, forecasting and strategic planning.

We have applied to the Ministry of Primary Industry to be a preferred supplier of these services, so if you need our services please list PKF Carr & Stanton on your application form as your preferred supplier.

 

Please note that this funding option is time bound so we recommend you act now before funds are exhausted. To apply: https://www.mpi.govt.nz/protection-and-response/responding/adverse-events/support-during-a-drought/2020-drought-recovery-advice-fund/.