His early forecast for the 2016-17 season is for mid $4 a kilogram of milksolids (MS) at the beginning followed by improving world dairy prices.
But the improvements would not flow into farm accounts with the bank until 2018, he said.
The average owner-operator cashflow chart, derived from latest milk price forecasts and projected forward, showed deficits of more than $100,000 each month from August through to March 2017.
The deficits didn’t disappear until the following season, 2017-18.
Williams said there was growing acceptance that “tweaks” to farm systems were no longer enough and farmers needed to make substantial changes to return to a lower cost structure and restore profits.
“To focus on survival, starting budgets should be set on the conservative side for 2016-17 and worked back from there.
“In our opinion this is around the $4.50 to $4.75/kg mark for the financial year, including dividends.
“If world prices rise, well and good, but if they don’t another tough year has been planned for at the outset, helping avoid unwanted surprises like those that have occurred in the past two seasons.
“Gaining further productive and cost efficiencies are not the only options available.
“Other options include restructuring the capital structure through an equity injection or selling off part of the farm and/or non-core assets.
“Alternative income streams can also be utilised, with massive growth in farm-related tourism activities built around the likes of the Central Otago Rail Trail, for example.
“Some farmers are also pursuing a change away from dairying into beef and crop production, as well as considering other ways they can generate additional income – all options should be tabled.”
Williams suggested that “gut feel” was not an effective decision-making process in current conditions and that more formal business planning was required.
The net dairy cash income expectation for 2016-17 indicated farms would not be profitable with interest and rent requirements greater than $2/kg MS and farm operating expenditure of more than $3/kg.
High operating expenses meant debt had to be low and vice versa.
ANZ, in its bi-monthly Agri-Focus newsletter, included examples of diverse dairy farms, both low and high-input, that had reduced farm working expenses to $3/kg or lower.
It also drew attention to DairyNZ case studies with cost structures below $3.50.
“Tightening and lowering the cost of production distribution below the mid-$3/kg MS is a key industry challenge to help survival and ensure the industry emerges in a strong position for when things improve,” Williams said.
The industry was often quoted as having a cost structure around the low-$5/kg but the reality was plus or minus $2 around that middle.
The common factor in all low-cost structures was growing and utilising more pasture.
In times of uncertainty farmers had to focus more than ever on the levers they could control for managing costs and delivering more or the same, with the same or less.
“Those who can respond and adapt best will emerge in the strongest position.
“The case studies provide credible evidence that good results can be achieved if effort is invested in the right areas.
“There are many things that need to be done well but critical areas of focus are often pasture and crop management practices, animal health/genetics, people, optimal stocking rates, use of cost-effective supplement, avoiding feed substitution and, perhaps most importantly of all, getting good, tailored advice.”
