Managing in a low milk price year is nothing new, with some farmers managing more successfully than others.
Some dairy farmers operate low-cost farm systems and make a profit with a $5 farmgate milk price. There are lessons from their management that we can all learn from.
Over the next few months, DairyNZ is running specialist Tactics for Tight Times events allowing farmers to share what works for them and options to remain profitable.
We want all farmers to build strength into their businesses, rather than maintaining status quo in the hope of a milk price lift next season.
DairyNZ analysis shows the industry is just within the long-term bounds of trends for average dairy company total payouts - if your farm can't survive those, look closely at the whole farm operation and make changes.
First steps - understand your position
A focus on cost-effective production will maximise profitability in all seasons, even when the milk price forecast trends down. The first step is to get clarity on the business’s financial position.
Have a budget and projected cashflow, and update it regularly. If you don’t have one, talk to your accountant and/or bank manager, but be closely involved in its development. It is important to understand and ‘own’ your budget.
DairyNZ has a range of budget templates to get started here.
Take control and communicate your plan
1. Get clarity on your financial position
- What is your starting point?
- Calculate your break-even milk price - start with total income and subtract farm working expenses, debt servicing, drawings, tax and capital expenditure.
2. Create a plan - focus on what you can control
- Assess your options. Step through expenses systematically and question every item. Will it give you a return? If not, can it wait? Spend a dollar to make $1.50, not the other way around. Will cutting costs have negative consequences next season?
- Focus on cost-effectiveness, rather than just cost reduction, and keep the basics of good management in mind.
- Do you use benchmarking tools? Talk to DairyBase or your accountant. Reports showing past physical or financial data helps identify past trends and where opportunities may exist.
- Focus on principles of low cost of production, regardless of farm system or input level.
- Maximise the amount of feed eaten from the dairy platform.
- Closely match the herd’s feed demand to pasture growth, through feed budgeting and monitoring.
- Ensure any purchased feed is economically assessed and aids good pasture management
3. Implement the plan and update it regularly
- Identify those who can help you succeed in achieving your goals and utilise that support.
- Communicate the plan well with employees and advisory team (banker, accountant, farm consultant, rural suppliers).
- Continuously monitor results.
- Make necessary adjustments.
Five tactics for tight times
- Assess the current state of your business. What is your starting point?
- Understand your options and create a plan.
- Execute the plan well - keep the basics of good management in mind.
- Identify those who can help you succeed and use that support.
- Communicate with partners, staff, bankers, accountants and other rural professionals.
This article was originally published in Inside Dairy February 2015