With winter well under way, it’s beginning to look like the bad weather has set in for the long haul. Not only is grain hard to come by, we’ve seen prices for all kinds of feed rising by over 50% in some cases. With the conflict in Ukraine still ongoing, there’s little relief in sight.
Meanwhile, some dairy farmers are facing $70,000 to $100,000 in additional costs per 100,000 kilograms of milksolids this year. That’s why it’s never been more important to have a plan for the year ahead.
Milk price uncertainty
The 2022 forecast Farmgate Milk Price of $9.60 has been revised back to $9.30, while rising costs have eaten into profits over the past six months. There’s still confusion over exactly where milk prices are going to go.
Fonterra has come out of the gate with a $9 midpoint, while NZX Futures are forecasting $10 and higher. On the other side of the fence, the banks are heading back towards the $8 ranges.
Who’s right? If you follow the “history always goes in cycles” theory, we should be over the hill and potentially prices will start drifting backwards, but the market continues to suggest otherwise. If you’re uneasy about what could be on the other side of that hill, and want some certainty, it might be time to consider hedging tools like Fixed Milk Price and Milk Futures.
Planning for cost increases
We haven’t seen the full impact of inflation yet because expenses have only been increasing significantly over the past six months. While the latest milk payout is good, costs are expected to increase to anywhere from 70c-$1/kg of production. If your farm does 100,000kg MS that’s $70,000-$100,000 of additional costs. That’s going to hurt.
That’s why it’s important to come to grips with your financial position now, when it’s not quite as busy on the farm. We all know costs are increasing. Fuel prices have risen by over 37% in the last 12 months. That means if you’ve copied over last year’s vehicle expenses as a base for FY23, you’ll almost certainly have under-budgeted.
You may also have received an email lately from your fertiliser company with their updated pricing. Consider if you can substitute products, or be more selective in your applications. Another possibility is soil mapping to make fertiliser applications more targeted, with less wastage.
Start your forecast by considering everything from break-even milk prices to pasture and feed requirements, then once you have your baseline, work to create a financial plan and establish goals for the year ahead. Make sure you assess every couple of months, so if you’re not tracking where you want to be, you can change tack before it’s too late.
Tax and interest rates
With farm profits rising in the last couple of years, your tax obligations have likely increased as well. With the change in provisional tax interest rules, you may need to allow for additional provisional tax payments so you aren’t caught short.
Likewise, consider when your interest rates roll off. An increased interest rate of 2% might double your interest bill. This has the potential to unravel your business, so work with an advisor to make some tweaks to your debt repayment timing, debt structuring and budget to reduce your risk margin before your next meeting with the bank.
With other headwinds such as labour shortages, wage and accommodation pressures (especially as workers will be less likely to travel while fuel costs are high), planning ahead for 2023 is essential.
As every farmer knows, a bit of hard work preparing the pasture can see you in clover later – or at least, on much firmer ground.
More: Kylie Cronin is an associate and rural advisor at Baker Tilly Staples Rodway in Taranaki.
This article first appeared in the August 2022 issue of Dairy Farmer.
