Keep a Close Eye on the Finances
The drop in the forecast dairy payout means that farmers are going to need to look at their finances even more closely over the coming season. Cash flow forecasts need to be updated at a milk price of $6 per kilo which is a drop of over $2 from last season. This will have a significant effect on farmers spending and will have a flow on effect for service providers and retailers in rural areas.
Get Down to Basics
There are a number of things that dairy farmers can do to help mitigate the effects of the reduced payout.
• Get your financial accounts for 2014 done as soon as possible.
• Prepare cash flow budgets for the 2015 and 2016 seasons.
• Concentrate on doing the basics well - looking after family, staff, livestock and the farm in general.
• Ensure stock are well fed through spring. Where necessary, feed budgets will identify the need for extra supplements. With urea under $600 per tonne, palm kernel and other supplements are still an option to ensure cows are in good condition and will get in calf again.
• If in doubt do not rear too many surplus calves as dairy conversations may slow and even this year was hard to sell surplus stock unless they are well bred.
• Keep in touch with the bank and rural professionals. Most dairy farmers will have large tax bills looming from last year's record season. Much of this will need to be paid in April 2015, although for some the best option will be to pay last year's tax earlier to avoid incurring use of money charges. Provisional tax payments for the coming season should be reviewed immediately and in some cases the income equalisation scheme will be a good option to defer income to a later year.
No Reason to Panic
Despite the forecast drop, most farmers should still be able to operate well at the estimated payout. We would expect to see some improvement in prices later in the season; however at this stage the final payout remains very uncertain. Farms with high debt levels and high input costs will struggle however. $6 per kilogram is a break-even payout for some farmers meaning little capital expenditure or principle payments will take place in the 2014/2015 season. The payout will also affect sharemilkers and contract milkers who are likely to see their profits drop by up to a third.
Still Confidence in Dairy Sector
Despite some short term pain there is still plenty of confidence in the rural sector. Farmers have always needed to cope with the highs and lows of farming and dairy farmers in particular are getting used to the volatility caused by overseas markets and the fluctuating kiwi dollar. Managing the business well, doing the production on the farm and basically controlling what you can control is the best way forward. Hopefully the weather will be kind and as the season progresses there will be some lifts in the payout. Interest rate increases should slow because of global dairy and log prices while the high kiwi dollar is also likely to continue tracking downwards. Another silver lining is the possibility of land and stock prices easing as these were getting out of reach for the average farmer.
Cheyne Waldron is a partner at Bailey Ingham Ltd, Chartered Accountants, Otorohanga