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An economy in strife means farming, as well as retail and construction, will add to the number of pandemic zombie companies facing wind-up.
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Food production crisis to feed insolvency backlog
07 August 2023
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Interest rate rises and a steep fall in household savings mean Australia confronts a recession and food production is in the front line of industries in strife, says a company turnaround specialist.
Vantage Performance CEO Michael Fingland said the problems facing fruit and vegetable farming-manufacturing meant the sector was of greater concern than other sectors.
“There are certain industries that are in a lot more strife than others – construction, discretionary retail, food manufacturing … but the really concerning one for me is fruit and vegetable farming-manufacturing,” he said on the latest Accountants Daily podcast.
“You’ve got significant labour, packaging, transport increases. And then you’ve got a worldwide shortage of fertilisers and other chemicals that farmers rely upon that’s showing no signs of coming down.”
“So you’ve got a significant inflationary impact on their business yet the prices they’re able to sell at are still pre-pandemic levels in the main.”
“Last year’s floods were catastrophic across the entire eastern seaboard. So you’ve got significant losses incurred due to weather events, then you’ve got this huge imbalance between pricing and supply chain, inflationary pressures.”
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“We’re working with a few now – the entire sector is in a lot of difficulty. And I think you’re going to see some reasonably well-known businesses get into further strife.”
He said companies now in trouble from interest rate rises and an unacknowledged recession would feed into an insolvency backlog from the pandemic involving thousands.
“While insolvency numbers are back to pre-pandemic levels … you’ve got three years now effectively of backlog,” he said. “So you’ve got another 10,000 to 20,000, maybe 25,000, companies that actually haven’t come through yet.
“And whilst those numbers have increased off a very low base, you still have that massive backlog and it’s mainly driven by the Tax Office ramping up activity – as they should.
“But they’re not going after all of those companies that shut the doors during Covid. There are thousands of companies that simply shut the door: cafes, hairdressers, a whole bunch of small businesses. They’re not the ones being chased yet.
“So you still got businesses that are effectively shut and have been shut for some time, but they haven’t been wound up. So those numbers will flow through the official stats over the next one to two years.”
He said Australia has yet to feel the full impact of interest rate rises, that the global economy is in dire straits and this time a resources boom is unlikely to save us, unlike during the GFC.
“Half of Europe’s in recession, the US is slowing, so we’ve got a lot of global deflationary pressures happening right now.
“What really saved us during the GFC was China. China started building like there was no tomorrow, we were the biggest benefactor through all of our minerals, and then the wealth created from that trickled across the wider economy.
“China is in a lot of difficulty themselves, they don’t have the foreign reserves to to reinflate their economy. They’re trying desperately but they can’t do that this time around even if they wanted to. So we don’t have that buffer.”
Worse still, a recession would be exacerbated by a plunge in household savings.
“And the biggest concern when you go into recession, if the household savings rate is already at a very low level, which means they don’t have a buffer, then typically the recession is much worse.
“And our household savings rate, yes, it skyrocketed through Covid because of the over-stimulus and people stopped spending money in the main, is now down to GFC levels. So there’s no buffer in the economy to deal with any recession as it comes.”
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