Thursday, March 28, 2024

Cashflow crunch looms

Avatar photo
The drop in Fonterra’s advance rate that came with its announcement of a fall in forecast milk price will start to be felt from next month.
Reading Time: 2 minutes

That’s when 48c/kg milksolids (MS) comes off what farmers had been expecting when the forecast, now $5.30/kg MS, was at $6/kg MS.The capacity adjustment payment of 52c/kg MS also comes off this month and remains off through to the February payments.

From then there’s no step-up in the advance until June, creating lean times in to the latter half of next year.

DairyNZ economist Matthew Newman said the expectation was for farmers to shave about 40c/kg MS off their farm working expenses, with much of that reduction made in the second half of the season. Autumn production will take the hit, particularly if conditions are drier.

Newman said what commodity prices were doing towards the end of the first quarter next year would be of big interest.

Fonterra chief executive Theo Spierings said the co-op’s forecast milk price depended on whole milk powder prices returning to the five-year average of US$3500/tonne by March.

NZX Agrifax analyst Susan Kilsby said that could be possible but farmers should steel themselves for further downward movements in milk price.

Currently the Agrifax forecast is for a $5.10/kg MS milk price for this season.

That’s also based on a US80c exchange rate. Kilsby put the forecast for the 2015-16 season at $7.50/kg MS with commodity prices averaging $3800/t and an exchange rate of 75c to the US dollar.

If prices didn’t improve significantly in time for the 2015-16 season farmers would face particularly tough times as the flow over from this season’s payout would be about $1/kg MS rather than the $1.50/kg MS that’s helped soften the blow to early season cashflows this year.

Newman put the average farm debt at $18/kg MS, making interest and rent payments about $1.40.

At $4/kg MS farm working expenses that meant farmers were barely breaking even once the dividend of 25-35c a share was added to milk price.

DairyNZ expected about a quarter of the country’s dairy farmers would be in the red. Dairy consultant Chris Lewis from Baker and Associates said $4/kg MS was probably a bit light on costs for many farmers. 

The drop in forecast meant most farmers’ closing position, in terms of their balance sheet, would be about 40-45c/kg MS down on their opening position.

For a 100,000kg MS farm that’s $45,000.

Lewis advised farmers to not only quickly review their cashflows but also get good tax advice.

They couldn’t defer paying terminal tax but there were avenues open to deal with provisional tax due after last year’s high incomes. 

Income equalisation was an option and farmers should be assertive when seeking help from accountants on this.

Total
0
Shares
People are also reading