Wairarapa Farm Consultants Baker and Associates are concerned the facts on Fonterra’s forecast payout aren’t being portrayed correctly in the media.
They say cash received last season is less than reported because of the way Fonterra structures its payout and outgoings are greater because reports focus on operating costs rather than total costs.
Their media release says:
. . . 2. For most farms in the period July 2015 to June 2016 cash receipts for milk will be $3.29 per kilogram milksolid (kg MS) plus 30 cents dividend for shareholders, plus 70 cents in livestock sales and other income, a total receipts of $4.29.
- To operate their farm our clients will spend $3.94 per kg milksolid, plus they need $1.48 to pay the interest on core debt and meet seasonal finance costs. A further 34 cents is required to pay farm owner living essentials.
- At $4.29 income and $5.76 of outgoings we expect average debt to increase by $1.47/kg MS.
Our model for an average farm producing 160,000 kg MS, produces a cash loss of $235,200.
We await the fine print but expect farmer shareholders will take up the 50 cents of Fonterra Support, an interest free loan.
- This leaves about $1/kg MS of debt to be funded by banks.
- Farmers without Fonterra shareholding and sharemilkers who don‘t have access to Fonterra Support will have relatively higher “external” funding requirements.
Our modelling suggests by October we expect a 10% reduction in the milking herd compared with the same time last year, there will be a 10% reduction in milk produced, with a 17% reduction in operating costs.
We strongly encourage farm owners to consult with their sharemilkers and contract milkers who operate businesses subject too, and dependant on the farm owners decisions.
Baker & Associates actively encourages its dairy farming clients to make conscious and well supported decisions on stocking rate, home grown feed and all expenditure items. Focus on the factors inside your control, make proactive and timely management changes.
That is good advice and Adolf at No Minister has some more suggestions:
. . . The dairy industry is flexible and resilient, for those who will accept change and think ‘outside the square.’ It is some years now since Adolf wrote up or read dairy farm budgets but the principles don’t change and all over the country farmers and their professional advisers will be examining options.
The level of debt is the overriding factor in these considerations and some, whose foolish banks obliged them by financing them into overpriced farms and herds when the payout was at its peak, will be forced to sell. They took the risk and they lost the gamble. That’s business. It is NOT a crisis.
There are many choices available and here are a few.
- · Sell the herd and apply the sale proceeds to debt reduction. Employ a keen young sharemilker. With cow prices low it’s a great time for a sharemilker to make a start.
- · If the soils are the right sort and any are, sell the herd and lease the property to a potato/onion grower for two years. They need fresh ground to control various diseases.
- · Sell 20%of the herd and apply the proceeds to debt reduction. The reduction in operating costs will be significant as will be the reduction in stress levels for the farmer. Stop buying truckloads of urea. Stop buying bought in feed. Watch the cost per head of animal health drop as the stress on the cows is reduced.
- · On a larger operation it may be possible to lay off one labour unit.
Of one thing you can be sure. It is not in the interests of the trading banks to see wholesale forced sales of dairy farmers and when I hear stories about farmers being forced to sell when they have not missed a payment on their mortgages I’m very skeptical. Maybe there is something else going on about which the public is not being told? . .
Adolf gives one example of a bank losing patience, I know of another.
Some people will have to sell but pushing people out is the last resort for banks and there is almost always more to the sob-stories than the public knows.