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23 Jul 2015
The relentless decline in the Fonterra payout, is the kind of challenge that most businesses face from time to time: plummeting sales. The difference that dairy farmers face in comparison with many other businesses, is the need to maintain the volume of sales in the face of declining prices, whilst also doing everything possible to maintain future production capacity.
However, dairy farmers must go through the same process as other businesses, using their knowledge of their own operation to plan and strategise their way through the downturn. The golden rules are:
In survival mode, these are some of the dairy farmers considerations:
Unless there's an alternative outlet, milk price is pretty much fixed (winter milk premiums excepted). Livestock sales can be an opppportunity. Weaning surplus calves can be profitable, but it can be a costly exercise in both time and feed. A good understanding and careful analysis of the costs involved is required.
Most dairy farmers aim to produce as much as they can. But milk production has diminishing returns: every extra litre of milk costs more to produce than the previous litre, so when the price is declining it is important to examine whether the top layer of production is profitable. If it is there may be an argument for increasing inputs, and if it's not, there may be more profit in producing less.
One of the reasons why dairy farmers are so good for the economy, is that they're big spenders. So reducing costs is the most likely area to produce cash flow gains. However, the dairy farmer has a challenge deciding which costs can be cut, without effecting short to medium term production. For example, how long, or to what extent can herd testing be cut, or fertiliser reduced without effecting short to medium term production?
Capital expenditure presents similar considerations. A fixation on having up to date and low maintenance equipment can send you broke. In tough times, a business has to be tough on capex decisions,deferring them for as long as maintenance costs are lower than the cash flow effect of replacement.
Most dairy farmers are reliant on debt, and control of the cost of that debt is critical in hard times. The cost comes in 3 components, and each of these should be examined separately:
Varying the term loan repayment period whilst the payout is low can be a useful way of easing cash flow.
Generally speaking, dairy farmers aren't big spenders on themselves. Their passion is the farm, and that's where the money goes. But nevertheless, in tough times, no business can ignore what the owners take out to live on. Laborious as it may be, a personal expenditure budget is advisable, and the best way to control personal expenditure is to stop living out of the business cheque account. Take a fixed monthly sum, put it in a personal account and use that to live off.
The cash flow forecast:
A cash flow forecast is an essential adjunct to the farm budget and if you want to negotiate with your bank, you'll need one. The forecast will project monthly overdraft levels based on the plan. It'll probably need a lot of tweaking to get satisfactory results. If you're not as good at driving Excel, as you are your tractor, you'll need some help. You do need input from an accountant, and you should be able to expect your accountants to go easy on their charges for this kind of work in tough times. If you need help, don't hesitate to call me.Resources: One thing dairy farmers have going for them is the amount of technical resources available to them. The Dairy NZ website is a treasure trove of benchmark data and financial calculator tools.
For more information on how we can help your business, get in touch