After five seasons of total payout between $6.35/kg milksolids and $7.90 (estimated) the average is $6.93, equal to its level back in 2008.
The rolling 10-year average sits at $6.26 milk price plus 20c dividend, and that measure has been steady across the decade despite the two horror seasons in 2015 and 2016.
At this time of the year, when dairy farmers are budgeting the new season for their own benefit and their financiers, Laming said simply picking a milk price based on the current market is not enough.
He harked back to this time last year when covid-19 cast a deep shadow over the world economy.
Milk price forecasts from bank economists started with $5 and Fonterra’s first estimate of $6.15 (midpoint) was enthusiastically welcomed.
Now Fonterra’s midpoint sits at $7.60 with some upside expected, so the final result may exceed the second-best payout, $7.90 in 2010-11.
It will also be the second $7-plus payout in a row, which has not happened before.
History shows that the top echelon of payouts have been followed by brutally reduced ones, Laming said.
A look at the current market for the reference dairy products shows $9.50 to $10/kg returns.
Analysts and economists are talking about $8 forecasts for 2021-22.
“But, while all of these outcomes are possible your budget should not be about picking next season’s payout but setting your financial bible for the year ahead,” he said.
Milk price is by far the largest variable in a budget, and it can change the most during the year.
“How much profit you generate flows from this, which then allows you to make decisions on the more discretionary items, including investment, debt repayment and drawings.
“And importantly, it is a key measure for your financier.
“Confidence (and appetite), lending facilities and conditions are often all set from how you deliver on this budget.”
Laming said a budget is a balancing act between being too conservative and overly optimistic, both of which have consequences.
The two rolling averages of milk price suggest a budgeting range of $6.20 to $6.80 with $6.50 midpoint.
While that may look way too conservative compared with current pricing, Laming wanted to add four considerations:
• Milk payout is historically volatile.
• Your budget can be re-forecast at any time with flexible management reporting software.
• Budgets should be something you know you will hit, not something you might hit. It is much better to have a sea of green variances rather than red.
• As payout certainty increases during the year, spending on more discretionary items can become more certain.
Laming had a final word about the cashflow effect of deferred milk payments from 2020-21 season, which would build payout received to $6.97 despite budgeting at the conservative $6.50.
NZAB team members were happy to talk with farmers about budgeting and banking outcomes, he said.
