Commodity prices then & now

January 23, 2016

Baker & Associates’ excellent weekly AgLetter compares commodity prices 18 months ago with current ones:

Oil price down 70%:     June 2014 ‐ US$103/barrel January 2016 ‐ $US30/barrel

Wheat price down 57%     June 2014 – US$287/tonne   January 2016 ‐ $US164/tonne  

US Beef down 16%       June 2014 – US$2.00/lb   January 2016 ‐ $US1.67/lb

US Lamb down 30%     June 2014 – US$1.37/lb   January 2016 ‐ $US0.95/lb

Whole Milk Powder     June 2014 ‐ $US3459/tonne January 2016 $‐ US2188/tonne

DAP Price down 20%     June 2014 ‐ $US499/tonne January 2016 ‐ $US399/tonne

NZ/US Exchange Rate down 25%    June 2014 – $0.8670    January 2016 ‐ $0.6540

NZ Floating Interest Rate down 1%    June 2014 – 6.07%    January 2016 ‐ 5.1%

NZ Inflation Rate down    June 2014 – 1.6%    January 2016 – 0.1%

It appears that the global economy is facing challenges on a similar scale to those of the GFC five years ago.

In 2008, the problems arose from over‐priced assets in the US and EU markets, and with incompetent finance sectors in those markets.

The current problems appear to arise from a slowdown in the economies of emerging markets (China and India), upon which western markets have become increasingly dependent over the last 10 years.

The implication for NZ agriculture will depend on how the combination of “plusses” and “minuses” balances out . . .

NZ Agriculture Hangs in the Balance

On one hand we have depressed in‐market prices for red meat, grain and dairy produce.

On the other hand we have record‐low interest rates, record‐low inflation, a weaker exchange rate, low fuel prices, low freight prices, low electricity prices and lower fertiliser prices.

We have the TPP about to be signed. We have a low‐cost grass‐fed production base.

There’s got to be something to work with here.

Possibly the biggest challenge is to accept the reality that commodity prices are going to remain highly variable, and that driving Efficiency of Production is the main tool that farmers have to secure profitability in the coming years.

During the ag-sag of the 80s we faced plummeting prices for what we were selling and high prices for a lot of what we had to buy, wide spread trade restrictions and tariffs, inflation nearing 20% and interest rates even higher.

Produce prices are low and not likely to go very high very fast.

But on the plus side we’ve also got lower costs of fuel and other inputs, better trade access, and low inflation and interest rates.

Those of us who survived the ag-sag also know that there’s no point wasting energy worrying about what we can’t control and opportunities from concentrating on what we can control.

P.S. The AgLetter is a weekly publication from Baker & Associates. You can find how to subscribe and back copies here.

It’s always a good read.


The facts from farm consultants

August 11, 2015

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.

  1. 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.
  2. At $4.29 income and $5.76 of outgoings we expect average debt to increase by $1.47/kg MS.
  3. Our model for an average farm producing 160,000 kg MS, produces a cash loss of $235,200.

  4. We await the fine print but expect farmer shareholders will take up the 50 cents of Fonterra Support, an interest free loan.

  5. This leaves about $1/kg MS of debt to be funded by banks.
  6.  Farmers without Fonterra shareholding and sharemilkers who dont have access to Fonterra Support will have relatively higher externalfunding requirements.
  7.  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.

  8. 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.

  9. 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.


Rural round-up

May 24, 2015

Farming at 17: Cheviot teen raises sheep, cattle – Beck Eleven:

Louisa McClintock is just 17 but with her 80-year-old grandfather by her side, she’s taking on a dry North Canterbury farm. BECK ELEVEN watches two generations work together.

For a teenage girl, she’s got a decent pair of lungs.

It’s another dry day in Cheviot, North Canterbury and Louisa McClintock is driving a couple of hundred sheep through a race, funnelling the corriedales towards the shower dip to stave off lice and fly strike. . .

Rural Broadband extension secured:

The passing of the Telecommunications (Development Levy) Amendment Levy Bill underscores the Government’s commitment to extending enhanced connectivity to regional New Zealand, says Communications Minister Amy Adams

The Bill passed last night with support from all parties, other than Labour.

“The extension of the Telecommunications Development Levy (TDL) will fund the $100 million expansion of fast, reliable broadband to the regions. It will also establish a $50 million fund to extend mobile coverage in black spot areas such as along main highways and in popular tourist destinations,” says Ms Adams. . .

Farming women band together – Rebecca Harper:

A gap in the market for a women’s progress group focusing on sheep and beef has been addressed by the new Wairarapa Rural Women’s Initiative. 

Sheep and beef farmer and Baker & Associates agribusiness consultant Ellie Meadows cottoned on to the need for such a group after speaking to other like-minded farmers, Lynley Wyeth and Lucy Thorneycroft.

Both women had taken part in the Understanding Your Farm Business course run by the Agri Women’s Development Trust and wondered “what next”? . .

 Seeing green – Sandra Taylor:

Seeing a bulk of greenfeed in a scorched landscape was enough to make any farmer salivate this summer and growing bulk is what forage maize does best.

A number of dryland farmers in Canterbury have been growing forage maize and while it generates a bulk of feed at a time of the year when little else grows, as a feed it is not suitable for every class of stock.

Charlotte Westwood, an animal nutritionist and vet with PGG Wrightson Seeds, cautions against feeding it to young stock such as newly weaned beef calves. . .

Budget funding boost welcomed:

A 20 per cent increase in tertiary funding for agriculture announced in today’s budget is being welcomed by Lincoln University Deputy Vice-Chancellor International and Business Development Jeremy Baker.

The increase is part of an $85.8 million boost over four years for targeted increases in tuition rates at degree level and above, which also includes a 7.5 per cent increase for science.

Mr Baker described the announcement as recognition of the vital role agriculture plays in the New Zealand economy, and for institutions like Lincoln University, with its specific land-based focus, in providing world-class graduates to meet the growing demand in the sector for highly-trained workers.

It shows the area is a priority for the Government and for New Zealand, he says, as it needs to be. . .

Resilient farmer Doug Avery will lead a tlak on drought in North Canterbury – Kim Nutbrown:

North Canterbury farmers are being urged to heed the advice of Doug Avery who will visit the drought-stricken area next week.

Farmers in the Cheviot area are experiencing record low rainfalls, putting their businesses under extreme stress.

Many are searching for a stress-relief valve. . . .


Saturday’s smiles

December 13, 2014

Einstein died and went to heaven only to be informed that his room wasn’t ready.

“I hope you won’t mind waiting in a dormitory. We are very sorry, but it’s the best we can do and you will have to share the room with others,” he was told by the doorman.

Einstein said that that wasn’t a problem at all and that there was no need to make such a great fuss.

The doorman led him to the dorm and Albert was introduced to the other inhabitants.

“See, here is your first roommate. He has an IQ of 180!”

“That’s wonderful,” said Albert. “We can discuss mathematics!”

“And here is your second roommate. His IQ is 150.”

“That’s wonderful,” said Albert. “We can discuss physics!”

“And here is your third roommate. His IQ is 100.”

“That’s wonderful. We can discuss the latest plays at the theatre!”

Just then another man moved out to capture Albert’s hand and shook it.

“I’m your last roommate and I’m sorry, but my IQ is only 80.”

Albert smiled back at him and said, “So, where do you think interest rates are headed?”

Borrowed from this week’s AgLetter, a weekly email publication from Baker & Associates which anyone involved or interested in farming would find an invaluable resource.


Gift tax by stealth

September 15, 2014

Labour yeah-nahed over whether or not capital gains tax would be due on the family home if it was sold by the beneficiaries of a will,  but would which make CGT a death tax by stealth.

It will also be a gift tax by stealth.

Baker & Associates latest AgLetter examines the tax and finds:

Gifting an asset will be considered a CGT event, except in the case of inheritance upon death. The person gifting will be liable for CGT based on the market value of the asset, and this will include farm property.
National removed gift duty because the amount raised didn’t justify the costs.
The major beneficiaries were accountants and lawyers and that would be the case should labour CGT be inflicted on us too.

Successful succession

April 15, 2014

A recent Baker and Associates’ weekly AgLetter* included Rob McCreary’s thoughts on succession planning, given at the Wairarapa Farm Business of the Year Field Day.

1. Rob’s farther was an academic. The greatest thing his father passed on to Rob was no expectation of succession!

2. You have to define what you mean by succession vs inheritance. In Rob’s view, succession is about investing in the energy, youth and enthusiasm of the next generation. It’s also about handing on your experience and being a mentor to the next generation. Inheritance is simply getting what’s left at the end.

3. It’s important to pass on some debt, as well as assets.

4. Make sure the kids have a business or a part of a business that they can stamp their mark on.

5. Because children work in their family businesses, there is an automatic expectation of succession. In older businesses, this expectation is probably a lot stronger, and therefore needs a lot more management.

6. If it’s important to treat all children equally, their net equity will only be equal for one day. After that day, their own business skills and external forces will change what that equity becomes. This is a fact of life. There should be no come‐back.

7. For a successful succession plan, your business needs to grow. Concentrate on improving the things that increase income. Don’t over‐capitalise. Buy more land. Spread your business.

8. Carry out your succession plan as early as you can. This gives your kids more opportunity to do something with their own equity.

9. All the young people I’ve come to know who have been given this type of help have driven their business further and better than the last generation.

 Succession is a generally complex which will be different for every business.

One measure of successful succession is that all parties are still talking to each other when it’s done.

If one or more offspring wish to farm and others don’t, it’s easier if there’s some off-farm investments for the latter. Not all farms generate enough income to enable this and many prefer to put any profit back into the farm.

Some people think it has to be equal to be fair, others are sure that fair isn’t always equal and equal isn’t always fair.

Regardless of which side you take on this, point 6 is right. Even if all are treated equally their net equity will only be equal ont he day they get it. After that it’s up to them.

* You can see more about the AgLetter and how to subscribe here.

The AgLetter is a weekly publication, which provides timely management and marketing information to sheep, beef and deer farmers throughout the country. Established in 1986, the AgLetter has become a valuable source of information and humour for a large number of subscribers stretching from south Auckland to Southland.

Each week, the AgLetter provides an overview of:

  • Topical management advice
  • Industry Issues
  • Store market prices
  • Export schedule price
  • Market analysis

Detailed prices on export schedules and store sales are provided.

In addition, special topics are covered each week that may range from stock trading profitability analysis, fertiliser price and product reviews, industry developments such as carbon trading, new financial instruments or drench resistance. . .

It’s well written, easy to read and informative.


Saturday’s smiles

April 20, 2013
A motorcycle mechanic was removing a cylinder head from the motor of a BMWR75 when he spotted a well-known cardiologist in his shop.
The doctor was waiting for the service manager to take a look at his car when the mechanic shouted across the garage,”Hey Doc, want to take a look at this?”
The cardiologist, a bit surprised walked over to where the mechanic was working on the motorcycle.
The mechanic straightened up, wiped his hands on a rag and asked, “So Doc, look at this engine.
I opened its heart, took the valves out, repaired or replaced anything damaged, and then put everything back in, and when I finished, it worked just like new. So how is it that I make £24,000 a year and you make £1.7 million …when you and I are basically doing the same work?”
The cardiologist paused, leaned over and whispered to the mechanic, “Try doing it with the engine running”.
Hat tip: Baker and Associates’ Ag Letter – a weekly newsletter full of matters of interest to anyone interested in farming, and at least one joke. Subscription details here.

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