Wednesday, December 6, 2023

Farmers urged to brace for a tough season

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Focus on what you can control and hang in there, say financial experts.
For farmers with the average annual milk production and 150,000 shares, the decline in value has been $360,000.
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Financial experts say dairy farmers should focus on what they can control as they grapple with an uncertain milk price along with rising costs in the new milking season. 

The sector is staring down the barrel of a challenging 12 months, with Fonterra’s midpoint opening milk price forecast for the new season at $8/kg milk solids.

Speaking at a Smaller Milk and Supply Herds seminar on tips for budgeting for the new season, rural accountant Cheyne Waldron from Waikato accountancy firm Bailey Ingram said 75% of its business consists of farmer clients.

“With farm costs increasing like they have and interest rates increasing like they have, it’s going to be a pretty tough next 12 months. It’s definitely profit under pressure,” Waldron said.

Interest rates have doubled, which is putting a lot of pressure on farm budgets. Banks are also being more independent with their farmer clients when it came to cashflows and budgeting, he said.

“They are wanting to see farmers prepare those forecasts and budgets themselves with the help of their accountant and advisers.”

Farmers should also try to be the best at those things they can control, he said.

“That comes down to animal husbandry, pasture management, team management, technical proficiency with equipment, planning and organising staff – all of those things that you can do to make yourself a better farmer.”

He recommended farmers have a 10-year plan broken down into one year at a time.

“We say to our clients that three out of every 10 years will be average, five out of 10 will be average, one out of 10, the gods will smile and everything will flourish and one out of every 10 will be a disaster.

“So plan for a bad year and put aside resources for when that bad year comes.”

He encouraged farmers to do their research, find out what works for them and make the most of their farm infrastructure.

“Look after your most important assets. That’s taking care of your farm, your animals, your staff, your family and you.”

Increasing gross farm revenue and decreasing expenses is often easier said than done. The farmer with the highest number of milk solids on a per hectare basis is not always the winner – “it’s the one with the highest profit per hectare”.

Farmers must also take ownership of their numbers and not just rely on their accountant for this. Use cash management software and keep those numbers up to date as the season progresses, he said.

“Identify what your working capital [overdraft] needs are and when your OD is going to peak – generally in one or two months’ time from now is when we’re seeing that – and communicating that with your bank.”

If farmers need an extension on the overdraft, talk to the bank now rather than when the money is really needed, he said.

“Using your budget will give you more confidence – this is where it is, it’s ugly, but it can inform your decision making and help you over the next season.” 

Waldron advised farmers to get their accounts to their accountant in early this season. If farmers leave it until December, they will not get it back from their accountant until February-March.

Dairy analyst Julia Jones reminded farmers this was not the first time the industry is being hit by a tough economic forecast. She urged them to make the most of rural professionals around them including advisers and bankers.

“Never ever let people leave you alone.

“We have been here before, there is no reason why we can’t weather this.”

She warned them not to play chicken with financial management, but face it head-on.

Rabobank Waikato area manager Laurence Richmond said farming is a long game and what has occurred in the past 12 months is abnormal and not indicative of the larger picture.

He encouraged farmers to build a strong team around themselves to support them, look at their cashflows, their needs and wants. If there is a hole, start that conversation with the bank earlier rather than later about options to get some cashflow through that period.

“That’s the beast we’re dealing with on a daily basis at the moment.

“It’s a long game and there are plenty of people out there to support you.“

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