Faced with a loss of $ 165,000 this season, the average Taranaki dairy farmer is advised to strategize to handle more of the same in the coming season.
Figures from DairyNZ show that the farm gate milk price of 3.90 kilograms of milk solids (kgMS) this season will generate milk production worth $ 418,000 on the average Taranaki dairy farm of 102 hectares with a herd of 287 cows. This average farmer will also receive $ 49,000 from the sale of shares.
Farm operating expenses will be $ 376,000, interest and rent payments will be $ 165,400 and the tax bill will be $ 6,000. Net withdrawals of $ 83,000 will leave the farmer with a loss of $ 165,000.
Westpac Taranaki region agribusiness manager Rhys Fulton does not anticipate that Taranaki farm owners will be forced out of the industry.
âBut some milkmen will fail if they don’t change their system,â he said. “Someone has to drive this change and that will be the person with the most to lose – the milker.”
Advising sharecroppers to focus on the sustainability of their business, he believes some will need to change their contracts or operating systems, while others may need to take even more drastic measures. “Adding more money to their business – and more debt – may not be the right answer.”
He says they’ll need to show their bankers how they’ll run their business during another low-payment season. “Show us what you’re going to change. Just hoping the payment gets better isn’t enough. Hope won’t pay the bills.”
While their youth and enthusiasm for the dairy industry made milkers resilient, they still needed to talk to their business partners. “The best answers always come from more than one mind.”
Realizing that they had to take care of the next generation of farm owners, most farmers would be receptive to their sharecroppers approaching them for help.
While keeping good milkers apart may cost money, it will likely be less than hiring new staff. âFarm owners secure the future of their sharecroppers and theirs by keeping them on the farm,â he said.
The cooperative nature of the dairy industry allowed farmers to come together and share their issues and problems because unlike other business owners, they were not in competition with each other. âTheir only obstacle is pride,â he said.
Typically, farmers in Taranaki could afford to repay higher debt because their equity was higher and their farm operating expenses lower than in other areas.
The high cost of dairy land, exceeding $ 80,000 per hectare in the main plains of Waimate last year, was offset by the area’s sedentary seasons, generally reliable rainfall, constant production, steady growth of pastures and low-cost power systems and infrastructure.
Figures from the Real Estate Institute of New Zealand put the national median price per hectare of dairy farms sold in the three months ending February 2016 at $ 36,687, below the 2015 median of $ 45,105 for the same period. .
Fulton said Westpac is confident in the future of the dairy industry and has hired 14 new employees to increase its share of the domestic market. âThere has never been an L-shaped recession,â he said. “It’s always a U or a V or a W. It will heal – we just don’t know when.”
ANZ Taranaki’s Commercial and Agricultural Director Dave Fuller also highlighted the advantages that set Taranaki apart from other dairy regions.
He said its fertile, volcanic, free-draining soils and fairly reliable rainfall have given farmers in the area the opportunity to grow grass at low cost. In difficult times, they had the opportunity to remove operating costs from their farming systems without compromising their operation or performance. âIf I had a dairy farm, Taranaki is where I would like it to be,â he said.
He advises dairy farmers to focus on making sure the effect of three tough seasons doesn’t take five years to overcome when the good times return.
Understanding their short and medium term financial situation was crucial. âThe accountants in the region do a great job of financial planning and budgeting,â he said. “But checking the budget doesn’t get anywhere. You have to live it and constantly review your costs and their impact on your budget.”
Managing pastures, animals, people, security and finances required a wide range of skills. He therefore suggested that farmers seek advice in areas where they lacked expertise.
Discipline regarding farm operating expenses should be accompanied by discipline regarding personal withdrawals from the business. One way for farmers to control their personal expenses was to pay themselves a salary.
They could earn capital by offloading assets that were not contributing to the business. “Don’t let your stubborn pride get in the way of decisions about disposing of non-performing assets like a beach house.”
Taking breaks away from the farm was important, so a boat, for example, might be worth keeping as it might not make a lot of money anyway.
Fuller said the way farmers watch and look after each other is a special feature of the rural sector and one of the reasons bankers appreciate being a part of it. “Farmers need to keep talking to others and they need to share their challenges and learnings.”
Taranaki was fortunate to have a proactive rural support trust committed to helping those in need, he said.
Like Fulton and Fuller, Andrew Darke, director of the CMK accounting firm in Stratford, said farm owners don’t want their catering businesses to go bankrupt. “It is in their best interests to help the separate milkers. So owners, side milkers and their professional advisers need to sit down and make a plan for the whole farm.”
A proper approach to cutting costs would be reducing fat rather than muscle in the farm operating system. Discussions between the parties should be honest and transparent and those who had not had such a discussion should have it now, he said.
Co-director John Dazley said farmers and sharecroppers who understood their financial situation were in a better position to discuss options with their bank and to negotiate fees and interest rates.
The challenge facing farmers and milkers apart was to plan and manage their operations well in anticipation of the end of the crisis, even though no one knew when it would happen.
âSome people cut their costs without understanding their costs,â Dazley said. “There is a lot of unhappiness and sadness out there, but if you believe all of it, no one would farm.”
He advises farmers and sharecroppers to meet with their professional advisers to discuss how to limit the deficit they face. âLook at your budget line by line to be able to move forward. Give the bankers a plan and do what you say you are going to do,â he said.