Saturday, December 2, 2023

Hill farming looks at deficit budget ahead

Avatar photo
BakerAg budget model for 2023-24 comes up with a net deficit.
Reading Time: 2 minutes

Falling lamb prices are dragging down revenue forecasts for hill country sheep and beef farms,  while rising interest rates grab the lion’s share of outgoings.

Farm consultants BakerAg have published a budget model for 2023-24 that results in a net deficit of $53,000 compared with a provisional 2022-23 outcome of positive $42,000.

Agribusiness consultant Ed Harrison, co-author of the July 1 AgLetter, said gross revenue is forecast to fall 10% this financial year.

“Three main factors are falling lamb prices, higher farm costs and steeply rising interest rates,” he said.

“We don’t want to scare farmers, but they do need to know what the model says and make early moves.”

The $95,000 swing in budget for hill farms comes from a 10% fall in sheep revenue and much higher debt servicing costs, now up to 28% of gross revenue.

The main dollar components are a $60,000 reduction in sheep income, $10,000 reduction in beef revenue and other income $15,000 down.

The budget model is an 850ha hill country farm running 8000-plus stock units at slightly under 10su/ha.

BakerAg is forecasting the lamb schedule peak to be $7.60/kg in October, falling away to $6.50 in the January trough.

The seasonal income for 5500 lambs will be down $7 a head and there will be fewer lambs born.

In the model, two-thirds of all 6200 lambs born are sold as stores for $101/hd and 900 cull ewes fetch $107/hd.

In beef revenue, male yearlings are sold for $1100/hd and surplus two-year-old heifers make $1230.

BakerAg includes several big assumptions on outgoings – steady farm working expenses, minimal capital purchases and disciplined drawings, drastic cuts to repairs and maintenance and no principal repayments.

In the model, total farm working expenses stay steady around $550,000 but now take 66% of the reduced revenue compared with 58% in the previous financial year.

Interest costs are factored in at an 8.5% floating rate on $2.5 million of term debt and 10% on working capital, totalling $236,000 this financial year compared with $204,000 last year.

The 15% increase in debt repayments takes them from 22% of gross revenue last year to 28% this year.

“The net result is a deficit of $53,000 and the red number at the bottom sends a clear message that all farm businesses will require prudent cash management and upfront communication with all stakeholders to ensure business viability,” Harrison said.

“Faced with a deficit, will farmers capitalise the loss, and turn working capital into term debt?

“Against a farm value over $8m, $2.5m term debt leaves 70% equity and room for more debt if necessary.”

He said early ewe scanning results are looking good and the feed situation is healthy.

“The first response to a budget deficit is to make good production decisions and maximise revenue where you can.

“We need a strong spring after several poor ones in a row – drier, warmer and growthy before what might be an El Niño summer.”

People are also reading