Incomes continue to drop
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.