Dairy farmers need to take action now to avoid going backwards once the drop in pay-out takes effect next year, says Justin Geddes, Agribusiness Principal from Crowe Horwath.
2014 was a record pay-out season and dairy farmers have just banked the last of the retrospective payments, but this season’s advance is more than $2 per kgMS below last year’s.
Full effects of payout drop still to be felt says Justin Geedes
“While accounts might look positive now, the recent record past payments are hiding the effect of this season’s lower advance. This drop will see a lot of pressure on farm cash flows from May to October next year.”
Like any business facing a significant drop in income, dairy farmers should be carefully examining their budget. He recommends:
• Looking at all variable costs to see what can be cut or improved.
• Being aware that provisional tax for this year is based on last year, so a re-estimation of the 2015 tax is essential.
• Looking at capital expenditure and working around or putting off ‘replacements’ wherever possible.
• Re-visiting bank funding to see if a change of loan term or type of debt would help navigate any shortfall.
The budget review should be looking a minimum of two years out, says Justin, as the full effect of the drop in pay-out will not be felt until the 2016 season.
“The impact of this will see some operations struggle to reduce debt, but reward farmers who make an effort to manage the situation now. If the pay-out drops further, break-even will become difficult for some.”
Dairy farmers should schedule regular meetings with their advisory team to review actual to budget performance, with every item scrutinised. Having a good team of advisors is important in the current tough environment.
It was also important for farmers to keep in close communication with their banker, and highly leveraged operations might have to consider a period of interest-only repayment on loans.
“The key message is that, just because the bank account might look healthy at the moment, they should start planning now for the impact of the forecast low pay-out.”