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Keeping you up to date with topical business news and views.
A Taranaki farm accounting specialist is advising farmers to be aware of their break-even farmgate milk price as they prepare their budgets for the 2016-17 season.
As the third season of low farmgate milk prices approaches, every farming business owner is looking at how to manage costs, says Staples Rodway director Marise James, of New Plymouth.
“For everyone the break-even price is different because it depends on your debt loading and your farming system,” she said. “Compare it to the forecast payout and look at what you can do to close the gap.”
Banks were now less willing to fund that gap and 85 per cent of farmers would make a loss this season. “You have to be a good farmer to have your costs below (this season’s Fonterra forecast of ) $3.90.”
James said farmers had been left numb by the prolonged dairy downturn.
“They’re waiting for the next season’s forecast, but no-one is expecting it to get better for a while. People will be putting their budgets together, and some are being asked to do that by their banks.”
She thinks only 10 per cent of farmers willingly prepare budgets. Banks required another 5-10 per cent to prepare budgets and that was a number that was growing.
So she wants farmers to take back control of their businesses and to develop an understanding of what it costs to run their farms.
Noting payout shocks occurred every few years, she said they were a wake-up call to get back to basics. “So people are doing that.and are focused on what they can control.”
Farmers who had been in business a long time could manage volatility better than young people new to farming and with high debt. Making money on a low payout was also hard for some high-input farmers who had to buy a lot of feed.
She suggests reducing spending on breeding programmes, herd-testing, artificial breeding insemination and calf-rearing pellets. “Sometimes farmers can get sucked into marketing campaigns. They can rear good stock by getting back to basics – it just might take more effort.”
She said budgeting was important both for the farm and for personal spending. Farmers should know what they were spending on groceries, doctors’ visits, children’s sport and entertainment.
“Would you want to lose the farm because you haven’t made sacrifices, because you haven’t thought about your personal spend in relation to farm expenditure and because you haven’t added it up?”
She said DairyNZ’s online benchmarking tool, DairyBase, showed the cost of producing a kilogram of milksolids, exclusive of interest, was $2.74 in 2008. By 2014, it had climbed to $4.33, with the biggest factor a $1 rise in feed costs.
“Through that period, the industry was on an improving payout trajectory and it was accepted that buying more feed would generate more payout. As the payout went up, it made good sense to add feed.”
But the cost of that feed was questionable in today’s environment.
“When you’re buying in feed, it takes discipline to ensure the herd eats all the grass. If you let them, the cows will stand and wait for PKE because it tastes nicer. As well, the palatability of grass changes as it ages.
“The key to using purchased feed in profitable farming is to make sure you use all the grass first. Don’t waste even a blade of grass.”
Kapuni farmer Steve Poole, with his high-input system, was one who ensured every blade of grass was eaten, she said.
Powerful tools were available to help farmers calculate whether the purchase of feed was profitable. “They are a good guide, but they won’t make the decision for you. There is a place for feed on a dairy farm, but it has to be managed.”
The primary consideration in the use of bought-in feed was animal welfare and the second issue was its profitability. “Putting more milk in the vat is not necessarily more profitable. Profit depends on the cost of the feed and on the level of the payout.”
In a particular season, a farmer might budget x amount of feed for y production. If feed costs increased or the payout fell, the budget should be revised, taking into account the effect on production of the removal of feed.
She said many farmers were considering shelving their System 4-5 feeding regime, destocking, and introducing a System 2-3 .
“(The infrastructure) may be sunk money, but don’t keep losing money because you’ve made the investment. And you still have the flexibility to go back to a higher system if the payout improves.”
She said some changes associated with upgrading farm systems helped farmers meet environmental requirements, so the money they had spent had not necessarily been wasted.
Discussion groups and community events could generate ideas for cost-savings and provided a forum for sharing experiences and asking questions. Another option farmers could consider was collective buying by neighbours of items like animal health products and fertiliser because bulk buying could generate discounts.
Any farmers needing help with budgeting should ask. “There’s plenty of free help available. Trim your expenses and then have another look because you’ll probably fid there’s something else you can remove. It’s the little things that make a difference. People who help themselves will always attract support from others.”
Meanwhile, Staples Rodway clients who own complex farming businesses have been trialling Figured, new online software that helps farmers manage their finances.
The new real-time reporting software has production planning and farm budgeting tools that work seamlessly with online accounting software Xero. It updates figures automatically when, for example, the farmgate milk price forecast is revised.
James said the practice was developing the use of Figured and was working with clients who wanted to be pro-active about their decision-making and financial reporting. “As the season moves forward, the forecast is automatically updated. Figured gives really good control over variances and lets you see where you are now,” she said.
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