In­comes con­tinue to drop

South Waikato News - - RURAL DELIVERY - By PETER HEX­TER

Many as­pects af­fect farm­ers’ in­come – world­wide weather, com­mod­ity prices, ex­change rates, world­wide milk pro­duc­tion.

Th­ese are not within your con­trol, so it’s of­ten no won­der if you have trou­ble plan­ning your fi­nan­cial year.

The fi­nal farm gate milk price from Fon­terra for the 2011-12 sea­son was $6.08 – a huge drop in in­come from a year ago, when 100,000kg/MS would have earned $760,000, but is now down to $608,000.

That is $150,000 less, though no less work for the farmer.

If the 2012-13 forecast comes true, we will see a drop of $235,000 over two sea­sons.

The main rea­son given for the re­duced pay­out forecast has been the high ex­change rate, sit­ting his­tor­i­cally very high at US$0.81.

How­ever, when we con­vert Fon­terra’s global dairy trade auc­tions to Kiwi dol­lars, we are see­ing sim­i­lar price lev­els to Oc­to­ber last year.

It is really where prices head from now on that will have the big­gest ef­fect on the 2012-13 pay­out.

It’s not only the weather in New Zealand that causes is­sues – the se­ri­ous droughts in the United States and Europe have pushed up the price of grain.

This has seen milk pro­duc­tion fall in the US and Europe, which should have an up­ward im­pact on com­mod­ity prices.

So how are the other dairy com­pany pay­outs shap­ing up?

Tatua of­ten man­ages a higher pay­out be­cause it sells added-value prod­ucts in niche mar­kets, at­tract­ing higher pre­mi­ums.

Open Coun­try Dairy was very com­pet­i­tive in the 2011-12 sea­son. Its farm gate milk price was 10 cents higher than Fon­terra at $6.18.

It set­tled milk pay­ments to farm­ers faster, and does not re­quire any cap­i­tal in­vest­ment.

This early set­tle­ment can help farm­ers re­duce fi­nanc­ing costs. With other dairy com­pa­nies’ pay­out sys­tems, you can wait up to 17 months to get full pay­ment for milk sup­plied.

Fon­terra shares are giv­ing a re­turn of 32c per share.

This equates to a 7 per cent re­turn on in­vest­ment.

The drop in the ad­vance rates paid to sup­pli­ers will make cash­flow tight for farm­ers in the cur­rent sea­son.

The ad­vance rate for Fon­terra sup­pli­ers was $4.40 for the 2011-12 sea­son, and this has dropped to $3.85.

This drop of 55c will have a large ef­fect on farm­ers’ over­drafts and fi­nanc­ing fa­cil­i­ties.

To im­prove the sit­u­a­tion, given the fi­nan­cial tur­moil and to smooth out the er­ratic in­come and ex­penses, dis­cuss your cash­flow and bud­gets with your ac­coun­tant early.

They can help to cal­cu­late what the fore­casts mean to your in­come, and to work out the tim­ing of and need for your sea­sonal fa­cil­i­ties with the bank.

Then talk to your bank early and share your cash­flows and bud­gets with them. Banks like to be kept in the loop, and will be much more favourable, if not sur­prised, by your re­quests.

Early dis­cus­sions with your ac­coun­tant and bank can save a lot of stress and avoid run­ning your debt fa­cil­ity down be­fore your in­come ar­rives.

Not plan­ning ahead may leave you in a po­si­tion of not be­ing able to pay the bills.

Long-term de­mand for dairy prod­ucts is pre­dicted to re­main very strong; it is also thought sup­ply will not meet this pre­dicted rise in de­mand.

The chal­lenge will be to keep costs down to en­able prof­itabil­ity to in­crease, and the prices of feed and fer­tiliser will be­come crit­i­cal to this, as they are the two big­gest ex­penses af­ter in­ter­est.

There is a sil­ver lin­ing – while pay­outs will con­tinue to be very volatile, the longterm trend should con­tinue up­wards.

Peter Hex­ter is a di­rec­tor of Co­op­erAitken ac­coun­tants of Mor­rinsville and Mata­mata.

Newspapers in English

Newspapers from New Zealand

© PressReader. All rights reserved.