Before Fonterra’s milk price announcement in the last week of January farmers had been looking at retro-payments averaging a total of 91 cents/kg MS with 10, 35, 25 and 21c payments flowing through from July to October.
The new advance schedule has cut those payments that flow into next financial year back to 71c/kg MS paid each month from July through to October as 10, 20, 20 and 21c/kg MS payments.
While still down on longer-term retro-payments they were better than this season’s disastrous 30c top up that excluded any payments in July last year and for some, depending on the shape of their milk curve, totalled even less than 30c/kg MS across their full season income.
Those with higher early-season peaks had been paid close to the full season’s price by the end of May and received very little in the way of wash-up payments.
Baker and Associates dairy specialist Chris Lewis said looking out to next season it would be prudent to budget on a milk price of $4.50/kg MS and an advance of $3.60 with a dividend of 30-35c/share.
“The 35c/kg MS forecast price cut was a big hit to this season’s budget but with the new advance it’s also very important people look now at not only getting to the end of the season but navigating their way through the next 18 months,” Lewis said.
In season payments look quite different to the publicised milk price and farmers should look to draw up cashflows for the next season based on a 24c capacity adjustment plus advance of $3.60 along with 71c/kg MS of retro-payments and a dividend of 35c/share.
For a fully shared-up farmer, that would equate to $4.90/kg MS within the season.
While it’s still a “sub-par” payout it is a slight improvement on this season.
If beef schedule income is included it’s not unrealistic to expect a $5.40/kg MS income, which looks a bit better again.
The important thing to do now was use the budgeting and cashflow tools available, look closely at what’s coming and have the conversation with financiers sooner rather than later, Lewis said.
“I think banks said at the start of this season ‘we’ll help you get through this’ and at the moment there’s still some latitude to work with but come May they’re going to have to play by a more black and white set of rules.
“Those that have already been having conversations with them and have shown they’ve been planning will find the banks a bit more malleable.”
Many farmers had done well this season to hone their pasture management skills, adjust their farm systems and re-learn how to produce milk much more efficiently.
“We’ve learnt we can take costs out of the system and operate our farms for less than we were without compromising production.”
For some though, the cuts to survive this season were greater than what could be sustained longer term and an improvement in payout was still necessary for most to get farms back to healthy profits.
The key now was for farmers to apply the discipline they’d had in re-learning efficient pasture-based management to a focus on financial management and ensure they were analysing, monitoring and adjusting budgets and cashflows in a timely way.
There were three positives to hang on to for this season:
• Interest rates were still low
• Good beef prices had added to total income
• El Nino hadn’t been as severe as predicted by early February for most.
Rainfall across much of the country through January enabled farmers to achieve production targets using pasture and helped get winter and autumn crops growing well.
Another positive of a very tough season financially had been the willingness of farm owners to work with variable order and herd-owning sharemilkers.
“I really have to congratulate all the farm owners, without exception, that I’ve come across who have come to the party to help their sharemilkers through this.”
There had been a significant shift away from variable order sharemilking toward contract milking to get through the season.
When announcing the 35c/kg MS drop in milk price to $4.15/kg MS Fonterra chairman John Wilson said as the half-year results announcement (due in March) drew closer the co-operative would be looking at ways to use the expected improvement in dividend returns and the financial strength of the co-op to help support farmers’ cashflows.
