DairyNZ senior project manager Paul Bird explains how and poses three key questions.
Huge fluctuations in milk commodity prices, combined with high debt levels carried by New Zealand dairy farmers and inconsistent weather, makes break-even milk price (BEMP) an important key performance indicator for every farm business.
Given the large cash deficits in many farm businesses over the last few seasons, it’s essential to establish what your BEMP is and, for many farmers, develop a plan to reduce it.
Where should you aspire to be? A small number of farmers break even well below $5.00 and maintain this level regardless of the milk price. This was seen among the 19 farmers who’ve shared their budgets at dairynz.co.nz/tactics. These farmers plan on a very low break-even budget of about $4.50/kg MS and stick closely to it, regardless of the milk price.
BEMP is the milk price required for a cash budget to achieve a cash surplus of $0. The budget includes net income from livestock and covers cash expenditure items, including farm working expenses (FWE), interest and rent, drawings, tax, and essential capital expenditure.
The biggest influence on BEMP is FWE. Some farmers aim to decrease total costs while maintaining production; others focus on lifting milk production while maintaining cost of production. Both pathways reduce FWE/kg MS. The second largest cost is interest and rent, which requires a prudent strategy. High debt levels increase BEMP and low debt levels reduce BEMP.
Having zero debt can mean you miss good business opportunities. However, having high debt can put your entire business at risk, particularly if the farm is operating inefficiently and the cost structure is above average. Farmers should think about the interaction between production levels, FWE and debt servicing, and the resulting impact on BEMP.
Benefits of a low BEMP
Farms with a low BEMP will have high levels of profit at the average milk price, generating high levels of profit for reinvestment or debt reduction. In financially challenging seasons, a low BEMP will eliminate or minimise cash deficits, reducing the need for increased overdraft and debt.
Remember your BEMP over the medium-term should be sustainable. Breaking even by cutting staff numbers, reducing repairs and maintenance, and applying sub-maintenance fertiliser is not sustainable.
Three key questions
1. Where does your business sit now?
Use the online tool at dairynz.co.nz/ tactics to work out your BEMP, then plot your result on the graph on the same page.
How have you fared over the past two years and how do you compare to other farmers? If you’ve been making cash losses and your debt’s increased, you may be thinking your BEMP is higher than acceptable and you may be considering a different approach. Another factor to consider is stress levels – farmers with a lower BEMP haven’t had to contend with increasing debt or overdraft levels.
2. Where do you want your business to sit in the future?
BEMP should be linked to your personal and business goals.
What are your aspirations for the future? Are you focused on strong equity growth and investing in land and cows? Or are you in a consolidation stage and focusing on debt reduction?
How do you feel about the last couple of seasons? Have they been a massive challenge or relatively stress free?
3. What will you do to get there?
If you’ve decided your BEMP must drop, it’s time to thoroughly review your business performance and take action. This is easier said than done as you’ll be operating a farm system with its associated cost structures in place, have current debt levels, and personal drawings expectations.
If required, seek support and advice from a farm consultant, farmer mentor, accountant or Dairy Connect farmers. They can help you fully review factors like your farm system, costs structure and debt management, and develop a plan.
Achieving a low BEMP
To reduce your BEMP you'll need to implement one or all of the following strategies:
Reduce farm working expenses/kg MS
- Cut costs without a significant reduction in milk income. If the expense is not giving a return, cut it.
- Lift milksolids production while maintaining costs, if possible. Can you use pasture better, improve six-week in-calf rates, or grow heifers to their target weights?
- use cash surpluses to repay principal.
- Sell assets to reduce debt.
- This is a decision that should be taken with respect to stage of life, family needs and goals.
For more information and tools to help you undertake a full farm business review, visit dairynz.co.nz/tactics
This article was originally published in Inside Dairy March 2017