Dairy cashflow needs reviewing after price cuts

Dairy farmers should re-evaluate their cashflow requirements after the succession of heavy milk price cuts.

Businesses need to be ready for the tougher pricing environment, consultants have warned.

Ian Powell, managing director of The Dairy Group, said the dairy market was looking “pretty weak” following last month’s Fonterra auction, when the average price fell 8.9%.

He predicted milk price pressure would not ease looking ahead to the next 12 months.

The great concern is quotas ending, which Mr Powell said would put even greater pressure on supply and demand.

“The outlook is looking quite difficult for the next 12 months,” he said.

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“Continuing strong quotas for dairy production is not going to help because we have strong growth in Europe and in other parts of the world and that’s going to put increasing pressure on milk prices,” he said.

He added: “There’s certainly no certainty the milk price will hold, even throughout the winter,” he warned.

Cashflow

Mr Powell said therefore it was “critical” for dairy business to prepare a forward plan for income and expenditure so they could adjust their peak borrowing requirements accordingly.

“Without a forward plan in place for income and expenditure it is very difficult to gauge what the cashflow will be. Once that’s known you can start to make plans for funding needs.

“If you don’t know what your business needs are likely to be in the next 12 months, it is difficult to farm with existing overdraft limits if they’re not likely to be big enough.”

Mr Powell said once farmers knew what their borrowing needs may be they should have an early conversation with their bank and make sure they are happy to support the business.

“The bank will want to be fairly sure that increased borrowing can be repaid,” he said.

Reinvestment

Mr Powell said it was important to consider business reinvestments and replacements needs carefully.

“Can they be postponed? If you are making machinery purchases, can other options be considered, such as hire purchase?

“That can help reduce your peak borrowing requirement.”

Feed costs

David Keiley, SRUC senior dairy consultant, said forward budgeting for feed and making best use of home-grown forage would be critical looking ahead to the autumn/winter.

“Even though the feed price is coming down if you can control these costs it will be a big help in offsetting any milk price reductions,” explained Mr Keiley.

He said feed costs accounted for about 35% of variable costs and ideally farmers should aim to get their ration costs below 14p/litre, including forage.

He added: “Farmers need to make the best of autumn grass and distillery by-products and molasses.”

Farmers perspective

Dairy farmer Tom Rawson, who has farms in both Yorkshire and Lincolnshire, says it’s his autumn-calving herd that will feel the full exposure of the milk price cuts.

He has only sold 350,000 litres of a total 1.9m litres from his autumn-calving herd compared to 600,000 litres sold from a total of 1.4m litres in his spring calving herd. And while no strategic changes will be made on-farm following the milk price cut, he will be reviewing his cashflow. “It’s inevitable we will have to alter our cashflow and will have to hold back on investments we may have otherwise made.”

Mr Rawson swapped his spring calving herd from a liquid to a milk solids contract earlier in the year, which gave him a 3p/litre price rise and softened the impact of the cuts. “We saw our milk price go up 10% and now it’s been cut by 10% so we are essentially getting the same price as last year.”