With the significant reduction in milk income forecast, even if this is a short-term correction, it is timely to re-examine the financial health of your business.
After 20 years of consulting in the dairy industry I have seen plenty of highs and lows, droughts and record seasons. Most dairy businesses will survive this drop in milk payout without too much hardship, others will struggle through, and unfortunately a small proportion of overleveraged operators or poor performers will leave the industry. Life goes on. Choose which category you wish to be in, and do not let the banks make this decision for you.
Three ways to help manage your finances:
- Increase the top line
- Decrease the bottom line
- Look below the bottom line
Increase the top line: Right now you will be close to reaching peak production for the season. This peak will be based on your prior decisions around cow condition, feeding levels, stocking rate and genetics. There is still plenty of time to influence how the rest of the season performs. These decisions will fall into two categories, namely (a) good management for any payout season, and (b) marginal decisions based on milk payout.
Most dairy businesses will survive this drop in milk payout without too much hardship, others will struggle through, and unfortunately a small proportion of overleveraged operators or poor performers will leave the industry.
The fundamentals that are important for any season are based upon maintaining optimum pasture quality throughout the season through regular feed budgeting, optimum grazing residuals, and harvesting surplus pasture to maintain pasture quality.
Marginal decisions around increasing production need to be based on the relative milk price and supplement price. There is plenty of good literature available regarding potential response rates to various supplements and this can be easily weighed up against the purchase cost of supplements plus wastage and feeding out costs. At a total income of $6.50/kg milksolids (MS), including stock income, the marginal profit on increased supplementary feeding is just that – marginal. Do your homework before buying.
Don’t forget about stock income. Stock income on a per kg MS basis ranges from $0.20/kg MS to more than $1/kg MS. Where do you sit?
Decreasing the bottom line: Last season there were many instances where even the best operators were caught in the excitement of a record payout year and allowed themselves to be lulled into using additional products with the aim of increasing production. It is time to revisit all these expenditure items on a line-by-line basis. Start with the big four: feed, fertiliser, labour, repairs and maintenance.
Feed: Be ruthless with evaluating your response to feed supplement, and ensure there is a good margin. Many farms last year ended up using compound feeds at a cost of $700/tonne whereas a cheaper alternative such as maize or palm kernel would have provided a better return on investment.
Examine your history with regard to growing summer and/or winter crops. If you can’t consistently grow at least a 10 tonnes drymatter (DM)/ha brassica crop and-or a 20t DM/ha maize crop, rethink your process or don’t bother. Aim for 15t DM/ha and 25t DM/ha crops respectively.
Review your young stock grazing costs. How many replacements do you actually need? In many cases farmers would be better off rearing fewer animals but growing them better.
Fertiliser: There are plenty of options to reduce your fertiliser expenditure if needed. Individual paddock soil testing, spreading fertiliser only on certain areas of the paddock, more strategic use of nitrogen rather than blanket applications, and precision fertiliser placement are just a few available to you. Fertiliser is certainly a big ticket item and one area where genuine savings can be made, although if you take this too far there will be long-term consequences.
Labour: With regard to labour savings this is always an area I am cautious on trimming. Many farm businesses are now paying their staff on an hourly rate rather than an annual salary. This does provide the opportunity to re-examine your productivity and efficiency on farm. Increasing efficiency will reduce hours worked, and thus provide a direct saving.
Repairs and maintenance: Repairs and maintenance is definitely a key item for close examination and there are genuine areas here where savings can be made. Do keep in mind that this is essentially deferred expenditure in many cases and when the payout increases there will need to be catch-up spending.
Animal health: Animal health is one of the most variable items I see on a farm budget, with ranges from $30 to $130 a cow. Take a critical look at your animal health spend because there have been several items that have crept in in recent years that are not truly necessary.
Below the bottom line: Most farming articles talk about income and farm expenses. Equally important is the discussion about what goes on below the bottom line, ie, what to do with your cash farm surplus. The accompanying pie chart illustrates where cash outgoings occurred for the typical farm business in 2013-14. Consider how this pie chart fits into a reduced total income of around $6.50/kg MS, including stock income. Some items to consider include:
One of the most fundamental (but still often overlooked) decisions to managing a lower payout is good understanding of your cash flow position and good communication with your bank manager and other rural professionals. Take the time to fully understand your cash flow position over the next six to 12 months and look at a couple of scenarios should we end up with a poor production season. Discuss your plans with others well in advance.
Finally as an observation it is interesting to compare how some of the more corporate type farming operations manage their finances compared with the typical family farming business. While there can certainly be some additional costs with regard to corporate overhead and administration cost in a corporate farming business, there can also be a much greater discipline on adherence to sticking to budget. Compare this to a family farming business, where the farm manager is answerable only to themselves and their partner, and there is less focus on sticking to budget. There are lessons for both.
We are in a business environment where income will fluctuate significantly between seasons. Get used to it. And make your own financial decisions before others do it for you.
James Allen is the chairman of AgFirst NZ, and a fellow of NZIPIM.
