Settled GDT prices lead to 5c dip in payout midpoint
Fonterra has reduced its 2020-21 forecast farmgate milk price range midpoint by 5c.
2014 was a record payout season and dairy farmers have just banked the last of the retrospective payments, but this season’s advance is more than $2/kgMS below last year’s.
“While accounts might look positive now, the recent record past payments are hiding the effect of this season’s lower advance,” he says. “This drop will see a lot of pressure on farm cashflows from May to October next year.”
Geddes says that, like any business facing a big drop in income, dairy farmers should be scrutinising 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 spending and working around or putting off ‘replacements’ wherever possible.
- Revisiting 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 Geddes.
The full effect of the drop in payout 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 payout drops further, breakeven will become difficult for some.”
He recommends dairy farmers schedule regular meetings with their advisors to review actual to budget performance, with every item scrutinised. Having good advisors is important in this tough environment, Geddes says.
Farmers should also keep in touch with their bankers, and highly indebted operations might have to consider a period of interest-only repayment on loans.
“The bank account might look healthy at the moment, but they should start planning now for the impact of the forecast low payout.”
