Saturday, December 9, 2023

Bleak financial forecast for dairy farms

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Fonterra capital return, dividend will rescue some from ‘pretty serious situation’.
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Agfirst’s annual survey of Waikato and Bay of Plenty dairy farmers has revealed a grim financial outlook for the sector as it faces rising costs and a declining payout forecast.

The financial conditions for many in the sector are worsening, agricultural economist and survey author Phil Journeaux said.

“The financial situation’s pretty serious. The payout is dropping, we have had near-record on-farm cost inflation and interest rates have doubled.

“Most farms made a loss last year and they’re going to make an even bigger loss this year.”

Farmer morale is also taking a hammering.

“They are getting squeezed financially, they are getting crushed by all of the environmental stuff. Psychologically, they’re not in a happy place.”

The survey was released at an event at Mystery Creek on August 3. It is based on data from 25 dairy farms from the two regions. A farm model is created based on that information – a seasonal supply farm that is 133ha, milking 368 cows, producing 135,000-145,000kg milk solids.

It represents the 3900 dairy farms in operation across the two regions.

The budget for the model is based on the current midpoint payout forecast of $8/kg MS. However, that is facing a downside risk based on current milk price futures forecasting of $7.70/kg MS, Journeaux said.

The previous season saw farmers face big increases in fertiliser, up 28%, feed and labour (both 8%) and debt servicing. This lifted by 45% on the back of rising interest rates. Cash flows through the latter part of the season are extremely tight, with many farmers hitting their overdraft limits.

Heading into this season, while overall farm working expenses are 2% down, debt servicing is up 20% due to the increase in interest rates.

Adding to this are tight feed supplies on many farms as they battle through calving, he said.

“The cost of everything has been trucking up steadily.”

The model forecasts a cash loss of $54,600. However, this is offset by the dividend and capital return being paid out to Fonterra farmers, resulting in a positive net cash position of $54,800.

That one-off capital return payment will get many farmers out of financial jail, he said.

Non-Fonterra suppliers who will not receive these payments are very likely to defer their principal repayment in order to reduce the loss.

“If you’re not a Fonterra supplier or you’re a sharemilker you’re not going to get the dividend and you’re not going to get the capital return and you’re well and truly in the shit.”

The budget model does not include any possible Scope 3 emissions payments.

It calculates a break-even milk price – defined as the milk solids payout required to meet basic expenditure requirements for the model, covering farm working expenditure, debt servicing, living expenses, taxation, and capital replacement – of $8.29/kg MS.

This is almost identical to last season’s break-even figure of $8.28/kg MS. This is because it is modelling on reduced farm maintenance as a farm working expenditure.

If this expenditure is adjusted to a more sustainable level, the break-even price lifts to $8.40/kg MS.

The survey notes that the continuing increase in costs is a major concern and continues to reflect the ongoing on-farm cost inflation, which over the past five years has run at more than double the level of the consumer price index. 

“Added to this is the rapid rise in interest rates, which is taking a significant bite out of available funds. The model is carrying an average debt of around $22/kg MS. If this debt was in the upper quartile, of say $34-$35/kg MS, then debt servicing in 2023/2024 would be 35% of net cash income, which would render the farm financially unviable.”

Journeaux estimated around 10-15% of farms could fall within that upper quartile “which in itself is a frightening figure”.

His advice for farmers for the coming season is to do a budget, plan and talk to their advisers.

“If you are in trouble you have to absolutely talk to your bank so they can understand and defer principal repayments. You need to plan so you have some idea of what you’re facing.”

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