Uncertainty of the final payout is nothing new for New Zealand dairy farmers. Many commentators and farmers are discussing and speculating what the final 2014/15 payout will be.
But the 2015/16 milk price is also on many farmers’ minds and the impact a second year of low milk prices could have on 2015 income, particularly through winter with low retrospective payments.
“Knowing your liquidity from now until the end of the season can help give peace of mind and control over the situation, as you put a plan in place to monitor cash and production targets,” says Angie.
An updated 2014/15 monthly cashflow budget will show where action may be required and an annual 2015/16 cash budget will also highlight risk areas for the business and spark ideas for potential actions on-farm.
Where to start
Planning – it’s a good idea to plot out cashflow from now until the end of May by updating or starting a new budget. DairyNZ has a budget template which works from a one-page annual cash budget to a monthly cashflow.
Plan income and spending through summer and autumn, and consider options if the summer is dry – feed budgets, fertiliser, repairs and maintenance, development on-farm and so on.
Autumn and winter 2015 could be tight, especially if next season’s payout is below $6/kg MS. Get ahead of the game and calculate cash income and expenses for 2015/16, with an annual cash budget.
The DairyNZ budget template gives a breakdown of the season’s total expenses (see pie chart) which will identify large areas of spend if cutbacks are needed. The template’s sensitivity table shows where changes to payout, production and farm working expenses impact cash surplus.
This enables a revisit of the budget, a chance to consider ways to reach physical and financial targets, and establish risk management strategies to protect cash surplus.
Milk prices and the weather are beyond anyone’s control, but minimising risks and looking at farm working expenses can mean a 5 or 10 percent change which will affect the bottomline.
Whatever budgeting template is used, farmers should test out a few milk price scenarios for 2015/16. This gives confidence and alleviates some stress and uncertainty. It also helps to know what is being faced before approaching the accountant, farm consultant and banker.
Milk price isn't a sure thing until after the season is complete, but having an idea about the long-term break-even payout, what needs to be covered this season and the business’s cashflow pattern are all part of longer term risk management.
DairyNZ budgeting templates
The most popular template is the annual and monthly cashflow budget. The annual budget sheet is connected to a pie graph of total expenses and a sensitivity table. The table is a relatively quick way to consider how changes to production, payout and expenses will affect cash surplus. Visit dairynz.co.nz/budgets
Interest rates form a large part of dairy farm expenses. At time of writing, the official cash rate was held by the Reserve Bank at 3.5 percent. Banks and commentators expect this to increase again in the first half of 2015.
This will have an impact on debt servicing for a majority of dairy farmers on floating mortgage rates. Chat with the bank about the potential impact, discuss fixed rates if preferable for some debt and add the increased payments into the budget.
This article was originally published in Inside Dairy November 2014