If farmers can find a way to farm to the current payout forecast, it will set them up to be more profitable when milk prices lift again – and to be more resilient if they fall, former Fonterra director Mark Townshend says.
Farmers are notorious for allowing their costs to erode their revenue during good years, he told a webinar run by the Small Milk and Supply Herds group.
The current economic environment is an opportunity for an economic reality check, to justify costs and maintain financial discipline.
“To make your business work at $7.25/kg MS means that you are really profitable when you get back to $9.25/kg MS.”
Especially if the farmer is able to hold those costs when the payout lifts, he said.
Milk price volatility is a reality of dairy farming and the positive side of that uncertainty for farming businesses was that it keeps farmers sharp.
That sharpness will be needed this season as farmers face a season when the milk forecast and farm working expenses mean most farmers will make a loss this season, he said.
The biggest savings farmers can make is identifying their fixed and their variable costs. Some of those fixed costs may be fixed only in the farmers’ mind and not in reality.
This could be as simple as using slightly less of a product or a slightly less glamorous version of it.
Any staff also need to have this mindset shared and explained to them to get buy-in so they understand the economic realities of the season, he said.
“You treat it in a way by saying, ‘I’m taking you into our confidence as part of your own learning’ and if you want to be more than just a farm worker or contract milker and be on a progression path, you need to understand this because 2023 will come again in 2028 or whenever.”
He also warned farmers against unnecessary supplementary feeding Too often it is about making farmers feel better about themselves at the expense of their bank account.
The rule of not spending more than 5% of the milk price per kilogram of dry matter is a good rule to follow. The correlation between production levels and profitability is still weak while the correlation between grass utilisation and profitability is still very strong.
While the recent lift in milk prices is great news, he is not relaxing because of the uncertainty around the El Niño weather pattern this summer.
Agricultural economist Phil Journeaux advised farmers to do a budget so there is a sound understanding of the current financial situation.
That budget may not look pretty, but farmers will be able to identify their pressure points. The survey farming model will defer debt repayment this season because it is unaffordable.
“Talk to your bank, they’re going to be crucial. All things being equal, your overdraft’s going to go up and you’ll need to borrow money to get through.”
The average farm needs a payout of around $8.40/kg MS to break even when including farm working expenses and depreciation.
Based on the current Fonterra midpoint forecast and including deferred payments from last season and advanced payments for this season, farmers are sitting on a deficit relative to the breakeven point of $0.73/kg MS.
Fonterra farmers will also have a $1.05/kg MS buffer coming from the one-off payments from the sale of the co-operative’s Chilean business. This pushes them over to the right side of the breakeven payout.
“The farmers with the issues really are non-Fonterra suppliers, sharemilkers and any that are heavily in debt.”
The low commodity price and the high costs of farm inflation are two of the biggest issues affecting the sector.
On-farm costs have lifted by 20% in the past few years while the average Waikato farm will spend $113,000 more on interest rates than it did two years ago, he said.
“There’s a lot of better places we could be spending $113,000 and to be realistic, I think those interest rates are going to sit up there for another 12 months.”
This article first appeared in the November edition of our sister publication, Dairy Farmer.
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