It's The Margins That Matter
OPINION: It appears to be difficult for people who haven’t tried to run a business to understand the difference between assets and cash.
DairyNZ's latest farm financial forecast on the Econ Tracker shows the national breakeven forecast sitting at $8.09/kgMS, while the forecast average payout received has increased to $8.84/kgMS. Fonterra is forecasting a mid-point of $8.50/kgMS.
While farm working expenses increased slightly, driven by increases in key operational areas such as electricity, irrigation, wages, and repair and maintenance costs, the reduction in interest and increase in farmgate milk price significantly outweigh these minor increases, improving the overall financial position of most farmers, says DairyNZ.
Waikato Federated Farmers executive Garry Reymer agrees that dairy farmers are feeling better.
He told Rural News that most have come through winter well and started the season milking better than last season. "Add to that the improved milk price and falling interest rates, you can see why there is a bit of optimism," he says.
However, Reymer cautioned farmers not to get too excited yet and don't spend their money.
"The new advance rate schedule that Fonterra has put out means there won't be a lift in the milk price to top up the milk cheque through most of the summer, right through to July.
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"With the volatility around geopolitics, things could change very quickly. I would also urge farmers to take a good look at what make up their costs.
"If they are relying on just interest rates to keep them in the black, I would suggest they look at their farm system. On the flip side, many businesses are also under pressure and good deals can be had if you shop around. This can be good but also remember that loyalty can also buy service when you need it."
On interest rates, Reymer is urging farmers to keep the pressure on their banks.
"But make sure you make a compelling case for a better rate. Know your numbers, have a plan that you can fully articulate, show the bank you are in control of your business and that your business is not controlling you."
With a lot of attention around the interest rate changes in recent months, the September 2024 quarterly update of the Econ Tracker provides a deeper analysis into what interest rate changes and timings could mean for dairy farmers this season, says DairyNZ's head of economics, Mark Storey.
“The alternative scenarios we explore show how the timing of interest rate reductions can influence the discretionary cash position of farmers. We see clearly that earlier rate cuts would result in greater cost savings and a stronger cash position, compared to reductions made later in the season,” says Storey.
