There was good news for dairy farmers last week with Fonterra increasing their 2021-2022 forecast farm gate milk price range to $7.90 - $8.90 per kilogram of milk solids, a mid-point of $8.40. This, coincidentally, is the same amount as the record payout for Fonterra farmers which was achieved in the 2013-2014 dairy season.
The advanced rate payment has been lifted to 65% of the forecast payout which equates to $5.45 per milk solids, with this increase coming into effect for the October payment which is paid out in November.
While the increased payout for dairy farmers is great news for the local economy, it is not all plain sailing. All farmers are feeling the effects of:
- Increased costs such as fuel, fertiliser, wages, fencing and building materials (if you can get them).
- Ongoing environmental compliance and costs related to this.
- Staffing issues and staff shortages.
- A credit squeeze in the rural sector.
- Reduced demand from China, as China increases its own production and becomes more self-sufficient.
- The threat from carbon farming and increased carbon costs.
- Increasing interest rates and increased tax.
A further threat for the dairy sector is the effect that higher commodity prices have on the worldwide supply of dairy and other food products. All countries tend to ramp up their production when commodity prices increase and this can lead to an over-supply and if this is coupled with falling demand through Covid-19 and other issues, then the payout can drop pretty dramatically. History tells us that in the 2014-2015 dairy season the payout went from $8.40 down to $4.40 and then reduced a further 50 cents to a payout of $3.90 the following season. We don’t think this will happen this time around, but nothing is certain in today’s world.
Our advice to farmers right now is to make good use of the dairy payout by doing the following:
- Getting your working capital position as strong as you can.
- Attending to any outstanding compliance issues which may include on-farm projects, as well as administrative compliance.
- Getting good financing arrangements in place with your Bank.
- Repaying debt.
- Sorting out any staffing issues, including ensuring there are good facilities and accommodation.
- Making sure you are meeting your tax commitments and allowing for increased provisional tax to be paid.
In addition, your own family wellbeing is very important. All of these things contribute to a strong and sustainable business.
We have been asked recently by a few clients as to how they can pay less tax. Tax can be reduced through the use of good business structures and careful planning; but our main point regarding income tax is that paying a higher amount of tax itself is not a problem, as this comes with good disposable income and creates future opportunities. A person paying tax does not have a tax problem, a person with the tax problem is one that is not earning enough income. A wise farmer once told me that it is not prudent to spend $3 to save $1 and I would have to agree with this.
Along with a good payout the weather and growing conditions have so far been reasonably favourable in the Waikato and King Country compared to other parts of the country. If farmers can make use of what looks like a bumper season ahead then they will set themselves up to deal with future challenges, which history shows us will be inevitable.
Chartered Accountant – Director