Financing Dairy Farm Infrastructure

This episode follows on from episode 35 “Successfully navigating farm loans” but focusses specifically on financing for large infrastructure projects such as cow housing facilities. This topic was addressed by my guest, Greg Kuchel, Senior Insights Manager at Rural Bank at the 2nd Raising the Roof conference in Hunter Valley of NSW earlier this year. Greg also touches on the evolving area of farm Carbon Plans and their place in seeking farm finance.

Links to useful resources related to this podcast:

Rural Bank Insight Reports

Australian Dairy Carbon Calculator

DairyBase

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Transcript

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The information discussed in this podcast are for informative and educational purposes only and do not constitute advice.

Transcript

The Business of Dairy 

Episode #36 Transcript – “Financing Dairy Farm Infrastructure”

Sheena Carter: Welcome to the Business of Dairy podcast. I'm your host, Sheena Carter. This episode follows on from episode 35, Successfully Navigating Farm Loans, but focuses specifically on financing for large infrastructure projects, such as cow housing facilities. This topic was addressed by my guest, Greg Kuchel, Senior Insights Manager at Rural Bank, at the Raising the Roof Conference in the Hunter Valley of New South Wales earlier this year. Greg also touches on the evolving area of farm carbon plans and their place in seeking farm finance.

Now, let's move on to infrastructure loans. So, I guess within the dairy industry in certain regions of Australia, we're seeing a number of farms that are moving towards a more intensive feeding system, shall we say, for various reasons, which we don't need to go into. But when I say more intensive feeding, I'm sort of talking about businesses that are now housing cows and feeding predominantly the milkers all their ration within that housing facility. And, obviously, these facilities are quite expensive to build.

How does the banking sector view this type of loan? Because it's slightly different to purchasing another block of land, or maybe it's similar to equipment, maybe it's not. Can you sort of explain how you view that?

Greg Kuchel: Yeah, look, I think there's probably a couple of aspects to this. One, it is a change that we're seeing in the industry, and banks are getting their head around this at the same time as the industry is getting its head around it. So I think that's probably a fair comment for all banks, or for people to understand, that banks are trying to understand this at the same time as the industry goes through this too. And banks love to be able to back up what's going on with history and what's happened, and sometimes it's probably in these sorts of situations, the lack of knowledge or industry information. And I see it starting to come with the work that you're doing, and others, that’s starting to give us a bit more clarity.

So, I think from that perspective, the bank's view on these types of scenarios is very different from buying the block of land next door. That's something that happens on a semi-regular basis. We all understand how it works and its implications. I suppose a couple of things at a high-level: when you do go into these housing systems and feeding systems, sometimes it's a stage change, but you are fundamentally changing the way your business operates. From a bank point of view, that’s a bit of a flag to say we need to look at this more closely. It's not just incremental growth; you're actually changing everything.

Sheena Carter: Yes, a different system.

Greg Kuchel: And in a lot of cases, you're becoming just as much a cropper as you are a dairy farmer, and you know, everything that goes from that perspective. So, from a bank's point of view, we sort of look at it from that and say, "Well, there's an element of risk in the way that this business is going to change from where it is to there." The other aspect is that in a lot of cases, the asset value that's being added by a lot of this infrastructure isn't, you know, if you go and buy a block of land next door for $2 million, it's probably worth $2 million tomorrow. But if you go and spend that amount of money on housing, or probably more than that, on housing, you know, sheds, and so forth, what's the actual market value of that property when it's all constructed, and who's going to want to buy it? If it did want to be sold, all those types of things. So, it is something that we're all working our way through, if that makes sense. And I think, you know, the banks are getting there, but if you are having a chat to banks about this type of thing, just realise the banks are getting their head around this at the same time as you are.

Sheena Carter: Well, and I guess that reiterates your very early points about it being a relationship when you're approaching the bank. Make sure you've got a good relationship with your financier and they understand what you're trying to do and have you got the skills and the ability to potentially move into these systems and make them work well?

Greg Kuchel: Exactly.

Sheena Carter: You've given me the finance to buy that block of land next door, so thank you for that. That was really good. Now I'm going to put a shed on it. What do you need to know now for me to get the finance to build that $2-3 million shed or more?

Greg Kuchel: I think the first thing is why. We need to understand why. And I think from that perspective, you really got to, you know, and that's not being critical of what a decision someone might make, but what's the benefit to you of going and building this shed and changing your farming system? So, we all understand, well, you buy a block of land next door and sort of work from there, but what's the benefit you really see in that? So I think from that perspective, have that initial conversation with your bank really early, as we touched on before. So start that conversation early so the bank can come along for the ride.

But then help them with that why and what's going to change. So, how does what we talked about before, the year-in, year-out scenario, look like? The expectation is, with a lot of the sheds and so forth, that you're going to increase your per cow production. How much do you think and how are you going to justify it? Can you go and have a chat to someone else that's done this and get a copy of their milk statements? How much did their production increase by? You know, that type of thing, as opposed to licking your finger and sticking it in the air and saying, "I reckon we'll get a 20% increase in production." Well, what's a backup there to be able to do that? Because the bank will want to know that. If you're going to flood a milk supply, what's that going to mean for your price and all those type of things? How's your labour requirement going to be? What's the machinery requirements? If you're going to go into a – as I said before, you're going to become just as much a cropper as you are a grain grower. Well, that's a whole other skill base. That's a whole other asset base you need to be able to do that. So, how are you going to back that up?

Sheena Carter: Okay. And I guess in terms of risks in these systems, what sorts of things are you looking at as a financier? I think from a farm management perspective, moving into a system brings new risks into the business. But what sort of things do you look at?

Greg Kuchel: I think you can split the risks in two. There's the project risks of actually doing the project, and then there's the ongoing risks. If I tackle it in reverse, the ongoing risk, how are your cows and your farming system going to change? What's the impact going to be of that change? Are you going to go backwards before you go forwards? Suddenly change the diet of cows, and what their routine is and all those sorts of things. How's that going to work? Do you have the skills, as in personally within the business, to actually run a system like this? What skills have you got to do that, when you traditionally haven't done that? Have you got the machinery, have you got the labour to be able to do it, all those types of things? Those ongoing risks are really around you’re ability to be able to adapt to a new farming system.

The construction risk, or during that project point of view, and I think the main thing is, if you are going to go and do a major infrastructure project, who's going to run it? Farmers are great at building things. Like, people have been building dairies forever, if that makes sense, and a lot of them are project managing themselves and have done very well at it. But if you're running an existing farming operation that might be quite profitable and well established, and then suddenly you're going to start setting up this other project and put up a shed or do whatever over here and go and spend quite a significant amount of money to do it, can you actually do two of those things properly at once, or are you going to end up doing a poor job at both? A bank's going to really want to understand if you've got your head around being able to do this yourself. And if not, a project manager or someone like that could be the best money you spend. So you say, "I can just concentrate on keeping my existing business going as it is here and let someone else deal with that." As long as it meets my criteria, just go ahead and do it.

That's a critical one because you do see where, the biggest risk with infrastructure projects is, you run out of time or you run out of money, or even worse, you run out of both. So, it's critical that it's well planned and done right from that perspective. So, that’s probably the big risk, is that project management aspect of it. But yeah, going back to the point before, have you really covered all your costs? There’s often hidden costs and you can sit there and think about it as much as you want, but at the end of the day they’ll, you know, start drilling a hole to put a post in for sheds and they hit different soil types that weren't meant to be there, or hang on a minute, that pipe wasn't meant to be there, or the power line was meant to run over there but it actually runs over there. All those sorts of things. I know it sounds a bit doomsday-ish, but it happens.

Sheena Carter: Yeah, and look, from the intensification project that I've been involved with, and we did a social science piece with that along with the University of Melbourne, and they interviewed a number of farmers, and this was also done in Northern Victoria, and what you’re describing, absolutely its reality. And some of the farmers have said, yes, we've really dropped the ball in our day-to-day operations of the existing dairy because it took so much time and energy, and headspace, and all the things. You lift up a rock and there's something else that you weren't aware of, or whatever, it does pop up, so absolutely, I think it's a very good point.

Greg Kuchel: Yeah, look, it happens. So you've just got to be really conscious of it, and what that means is, if you accept the fact that it's going to happen, then you've got to have room in your budget to cover that and have a contingency budget, and you've got to have room in your timeframe to be able to cover that as well. You know, if you've got a cut off that you want to be in there by the time cows start calving, well, you've got to work backwards and then give yourself an extra month or six weeks or eight weeks, or whatever that period of time is to cover those differences. So yeah, not to labour on it, but that project aspect of it, from a risk perspective, is quite a big one that needs to be handled well.

Sheena Carter: Yes, absolutely. And I guess, you've mentioned project manager. There's going to be quite a number of people on, let's call it a team, to get these projects happening and done, who would you like to see as a financier on my team if I'm building a shed? What are you looking for?

Greg Kuchel: From my perspective, I'd be looking for, number one, is actually all the family on board with your first? Are they all part of the team? They might be saying, "I'm all comfortable with this, but I do need to look after the existing farming operation," and that's completely fine. But is everybody on board?

Farm consultants: have you had the right advice, with the right skills for the farming system you're going into, to be able to help back up your numbers? You're taking a risk, the bank's taking a risk, you want to be pretty confident this is going to work. So you want a farm consultant on there. 

The dairy company's milk process is handy from the fundamentals of how my milk supply is going to change. So, what information, can they help you with from there? Your vets and nutritionists, but really, you know, your builders. So, are they the right people? Do they have the right knowledge and skills? Have they built these types of things before? What's their reputation like? Your suppliers, how reliable are they, and so forth as well?

From a supplier point of view, we've seen insolvencies in the construction industry and so forth, so there’d be nothing worse than having a supplier going broke halfway through. Now, it's hard to predict that, but have you got reliable suppliers that have supplied these types of products before?

So, that's probably your main ones, from that point of view – have you got the right farm consultant, have you got the right builder or project manager, have you got the family around you? And around the edges, you know, the other service providers that you rely heavily on as well and are they on board with what’s going on. But it's important to have the right team around you to be able to make sure you can get your way through this, because you only get one shot at it, so you want to get it right.

Sheena Carter: Absolutely, yes, and it's a significant undertaking, so yeah.

Greg Kuchel: Exactly.

Sheena Carter: Any other considerations for these infrastructure loans from your perspective?

Greg Kuchel: Probably the bit I would just touch on is some of the conditions you might find that are different for something like this. So, people build dairies all the time. Banks understand how dairies get built. Farmers understand how dairies get built. Blah blah blah, it's pretty stock standard. Sometimes when you go into some of these bigger infrastructure projects, you might find the bank starts to put some conditions or requirements on the lending that are different from what you've seen in the past because, again, we've seen construction companies falling over, so there's an element of risk from that. But the dollar's getting bigger, the complexity's getting bigger, and probably what you would see from a banking point of view, the requirements we might put on someone if they were going to build a supermarket or a shopping complex, or something like that, starts to intertwine into what you might see from a farming perspective. You know, a bank might want to see well, who's actually building this project. Have they got the right licenses, have they got the right skills, background and so forth?

Insurance seems simple, but it's a big one. You know, public liability insurance—are we all completely covered here from the builder's point of view, from the farmer's point of view, and so forth? The bank will probably want to see a lot of the plan approvals. So, your EPA approvals, fire approvals, council approvals, all those types of things. The bank may ask or expect a quantity surveyor, or a QS, to be involved in the process.

There might be something that someone's never dealt with before, but a QS is someone with the skills and knowledge to be able to monitor a project from both a timeline and a money point of view, and to make sure that, is it going to hit the end date at the dollars and timeline set, and if not, we’ll know about it early, so it doesn't happen at the 11th hour. It happens early on, oh, this isn't going to quite work. So you might see that requirement. 

You might see what’s called a tripartite agreement, which is an agreement that goes between the client, the bank, and the builder. And basically what that means is that, say for example, the builder goes broke halfway through the process, it gives the bank and the customer the rights to appoint another builder into that project, or the scenario where, unfortunately these things happen, there might be a death in the family, or the main project person within the family can't do that, the bank can step in and essentially take over ownership of those plans and employ and act on behalf to be able to actually finish this project and get it done. And you know, that’s quite common in the construction industry, panel valuations and so forth, and completion certificates. So yeah, there’s probably a few of those requirements that a farmer may not have seen these before, that once that becomes a true construction infrastructure project, they’ll start to see some of those elements flowing through from the bank occur. And at the end of the day, it's there to make sure the project's finished on time and within budget.

Sheena Carter: Excellent. Well, that's really good, thank you for that, Greg. I think it is definitely a new playing field for those that are undertaking these projects. So I think you've covered quite a bit of detail on what requirements are there and why. So thank you for that. Now, we might just change tack slightly. Relationships, we're constantly talking about relationships between the farm owner and the bank. I think one of the important times that you've got good relationships is when things get tight. We know that happens in agriculture for whatever the reason might be. How does that play in, in terms of, I can see something's coming up in my business, whatever it might be, some sort of a disaster that's either within my control or outside my control. How do we work through this together?

Greg Kuchel: The first thing to say, it does happen and it will happen, and banks understand that these things happen and that's the nature of lending to agriculture, that things go up and down. So don't feel as though you're the only person out there because it happens all the time. And if it's not your industry, it's another industry at that point in time. So banks are always dealing with different industries that are going through tough times. The simple message is engage early, talk early, be in contact with your bank and let them know what's going on before you even get to the point of saying, well, geez, we might have to do something here. But so they're aware of, all right, well, I'm thinking about this. I'm trying to work out what my plan is to get through that. 

The worst case scenario is when we get a phone call from someone who says, oh, look, I've just been carrying my creditors now for 180 days and I'm getting knocks on the door and I've got to pay this and I've got to pay that. They're refusing to supply me grain or fuel or something like that. That's not a scenario that's good for anyone.

So engage early. Let them know what's going on. And look, there's options out there. The banks certainly have options. You know, you can interest only if you're paying principal on loans, you can defer payments, you can do all those type of things, restructure your loan. A lot of the time you'll end up seeing people with a hardcore portion in their overdraft. Go and refinance that, stick it onto a term loan, a lower interest rate and pay it off over a longer period of time and reset and go again and go from there. So, yeah, look, there's many options. The banks are quite used to dealing with it. The dairy industry might be going well at the moment, but there's other industries that are struggling, so we're dealing with those type of things all the time. But just engage early and start that conversation early is the best bit of advice I could give to anyone that's heading into that sort of scenario.

Sheena Carter: Yes, no one likes nasty surprises.

Greg Kuchel: Exactly, exactly.

Sheena Carter: Okay, thank you. That's very good. And I think just another thing that is quite topical at the moment around the world, and it doesn't matter what industry you're in, but is around emissions. This might seem like a funny topic to bring up, but carbon emissions, or greenhouse gas emissions, and there's a lot of talk within the dairy industry and there's a lot of tools within the dairy industry for farmers to be able to measure their emissions, and you know, ultimately come up with a plan, I guess, is the eventual end point for farm businesses around reducing emissions. That's a whole other topic in itself, coming up with carbon plans and why you would and what you might do, but are carbon plans something that the banking sector is looking at in terms of expectations for clients to have carbon plans?

Greg Kuchel: Yeah, look, it is becoming quite a topical thing to be dealing with at the moment. And I suppose to give a bit of background, banks, along with a lot of large businesses, are going to have to start, over the next few years, reporting on the emissions of our customers that we finance and making that aware. And obviously that means that eventually banks are going to start asking their customers, well what are your emissions? And from most bank's point of view, when you look at it, agriculture is a large emitter of greenhouse gases, so agriculture is going to get some attention from all industries and banking as well, from that perspective. But I think what you'll see over the next few years, you may start getting asked that question. Maybe some of the bigger operations will be asked what their number is, but then we might apply some modelling to the average, or the smaller size, operation so we can sort of work out what the emissions are from that. The reality is, it's not just banks, it's all large companies, processes and all those sort of things, that are starting to need to ask that question. What people start to think although, is the bank going to start not wanting to support me if I'm a high emitter and those type of things, and I think from that perspective that this type of thing will be more of a carrot than a stick approach, if that makes sense. I think that you're already starting to see banks starting to give discounts for loans that are, you know, for the purpose of people reducing their greenhouse gas emissions and all those type of things. It'll be an encouragement to get people where they are. And the other aspect of it, I think, is what you'll also see is that banks will look at the overall sustainability of your business. So, not only your emissions, but do you actually have some offsets somewhere else, you know, is there timber that's, you know, locked up? All that type of thing. So on balance, are you actually alright? My bit of advice from this perspective is, certainly don't panic from it but be aware, just educate yourself for what's going on. It's the way the world's going, we're all going this way, we're all going to have to work with it. And, you know, just from a personal point of view is, that farming in general and agriculture has proved itself over the time to become very resilient and adapt to change and the way people farm now is very different to the way they farmed 20 or 30 years ago because of the challenges that have been thrown in front of them and I have no doubt that farmers will tackle this with exactly the same approach and come up with some real good innovations and changes to ensure that they can suit the environment going forward. I don't think you can underestimate agriculture's ability to adapt to these type of changes as well. So I think, be engaged and be part of the process, is my best bit of advice at this point in time.

Sheena Carter: Yeah, excellent, thanks, Greg. And yeah, the dairy industry, as I said, has already got lots of, well, multiple tools available for dairy farmers that are interested in knowing their number if they don't already. And I can put a link to those in show notes if people would like to investigate further. Finally, Greg, just some key points you'd like to leave with farmers around financing or approaching banks for finance?

Greg Kuchel: Out of our discussion, I think engage early, build the relationship is key number one, I hope that message has come through from there. If you're doing something, homework, planning, homework, planning, homework, planning, is the best thing you can do to get yourself really set up from there. Get a good team around you, question yourself, can you really run, you know, if we talked about shed infrastructure and so forth, can you really run a farm and do a major project at the same time? Don't be frightened to spend some money on a project manager or something if you need to. Monitor your costs really closely, monitor your time frames really closely, and leave yourself some, you know, room for error in there because it's going to happen. But I think at the end of the day, you know, my bit of advice is enjoy the experience, I think. I love building stuff, people love building stuff, it's great fun to do, but you're going to have it on your farm for the next 30 or 40 years, so just plan it well, manage it well, and you'll end up with a great outcome. And if it's an enjoyable experience for everybody, it's great. So look at it positively, but do your homework.

Sheena Carter: Yeah, excellent. Thanks, Greg. It's been a fruitful discussion, lots of valuable insights for our listeners, I hope. So thank you very much for your time on the podcast.

Greg Kuchel: No, it's been a pleasure. I've enjoyed it.

Sheena Carter: That's all for today's episode of The Business of Dairy. We hope you enjoyed diving into the fascinating world of dairy farming and industry insights. As we continue to expand and evolve, we greatly appreciate your support. Our show is thriving, attracting new listeners each week. But we believe there's always room to grow and we need your help to make it happen. If you've found value in our discussions, we kindly ask you to take a moment to rate and leave a comment about the podcast on your preferred platform. Your feedback not only lets us know what you enjoy but also helps boost our visibility to others who might benefit from our content. Remember, your ratings, comments and shares are vital in spreading the word about The Business of Dairy. Together we can ensure that more people have access to the valuable insights and knowledge shared on our podcast. I sincerely thank you for being part of our community and we look forward to bringing you more engaging episodes in the future with the continued funding and support of the Hunter Local Land Services. Until next time, stay curious and keep milking those opportunities.