Gippsland - How Now Gippy Now - July 2010 Edition
How is the cash travelling?
The milk price has lifted, input prices have dropped and it’s been a great growing season so you should be in pretty good cash position!
What? That’s not the case on your farm? What are you doing wrong? Absolutely nothing!
The fact is that the increase in milk price has not flowed through to the bottom line sufficiently yet. Surveys taken at recent discussion group meetings have indicated that most people are just clearing the bills and, at best, paying debt interest and principle, but remaining cash neutral.
The ‘turbulence’ of the last 16 months has created the cash tight situation (but accrual based profitable) currently being experienced by many, as indicated by the following:
- Milk Price
The following data reflects the milk price situation for a 120,000 kg milk solids (260 cows) farm, supplying a major processor in a seasonal pattern, but generally with good milk flows after Christmas.
- 10 year average milk price - $4.40 (32.8 c/L)
- 5 year average milk price - $4.86 (36. 2 c/L)
- Opening price July 2009 - $3.40 (25 c/L)
- Cash price paid (including shares) the last 12 months $4.10 (30.5 c/L)
- Cash price paid (including shares) the last 16 months $3.84 (28.6 c/L)
- Accrual (value of milk not when it is paid) price paid 2009/2010 $4.30 (32 c/L)
- Opening price estimates 2010/2011 $4.60(34.2 c/L)
- Closing price estimates 2010/2011 $5.35 (40 c/L)
No wonder the cash flow has been tight. The milk price received over the past 16 months has been 10 per cent lower than 10 year average. It is great that by the end of 2009/2010 the price increased by 27 per cent from opening but this only highlights the low opening price.
The projected milk price for this season will provide the potential for farmers to achieve a reasonable return on their efforts and assets, depending upon season and input costs.
But beware the changes in milk pricing systems planned for 2010/2011. It is important to remember that any incentive paid by a milk processor is only worthwhile if the dollars you earn at the end significantly outmatch the dollars spent chasing that incentive. The further the milk production curve moves away from the pasture/forage growth curve of your farm then the higher your risk. Milk processors change pricing systems in short time frames, but the farm production milk curve takes much longer to change.
- Input prices
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Since September 2009 input prices have decreased. Average 10 year grain/concentrate price is $260 per tonne and 2009/2010 was slightly lower. Less fodder has been purchased, since the spring was generally strong, but then fodder bills payable in spring and summer have been higher. Fertiliser prices have significantly reduced but are not at five or ten year lows. A 2001 fertiliser price list had super potash 2 and 1 at $250 per tonne - you wish!
- Tax
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In many situations (particularly where there was minimal tax planning) tax payments from the 2009/2010 year for both the 2007/2008 and 2008/2009 year have placed further pressure on cash flow. This highlights the fact that no dairy farm business should end any financial year not knowing its tax position reasonably accurately. If your accountant can’t get it done on time then politely change accountants. A ‘bare bones’ approach to costs in 2009/2010, to achieve a positive cash flow, in many cases will have resulted in a taxable profit which hopefully you were aware of by 30 June 2010 - if not it’s worth finding out.
As we move into 2010/2011 remember:
- Analysis work, done by GippsDairy and Dairy Australia in June 2009, indicated that even if it was a good season and farm working expenses decreased to about $3.00 per kg milk solids (lower input costs and ‘bare bones’ expenses), a milk price of $4.00 - $4.50 was essential for the majority of dairy farmers to ‘break even’ (add $1.00 for large farms with paid labour). This analysis work is an example of milk levies being used locally. It helped quantify the milk price impact on farmers so accurate updates could be given to the finance sector, shires and the general community. For more information about milk levies used nationally visit www.dairyaustralia.com.au
- Even though the cash is tight the ratios and settings are good. The milk price to grain price ratio just based on estimated opening is 1.36 (34c/L: 25c/kg). In July 2009 it was 0.8 (24c/L: 30c/kg). It will pay to produce that marginal milk this year or milk that marginal cow. The fact is that at a milk price of $5.00 and a grain price of $250 you need to generate 60 kg milk solids to get a 20% return on your $250. This equates to a 0.8 litre per kg fed which is quite achievable in the right situation.
- There are commercial programs available to compare companies. Payment schemes are complex and you cannot tease apart the details by just looking at milk statements.
- An annual cash budget via your factory field officer or consultant may be worthwhile completing to confirm that the business is in a strong position.
- If cash is still extremely tight then the only solution to clear the murky water is to do monthly cash flows for at least the first six months.
- Many businesses derive income from the dairy industry. It is a ‘healthy’ working relationship, but remember that those businesses have also done it tough for the last 16 months. When considering a new product or cash outlay that did not occur last year, ask the question, “If I spend $1.00, can this return $1.20 or equivalent in lifestyle benefits?” If not then why risk it?
- It has been (and still is on many dairy farms) a high pressured juggling act for 16 months. Cash flow has not allowed holidays between January and June 2010. It is important to try to start the holiday fund as soon as possible - the return will be a lot greater than 20 per cent!
Contact:
GippsDairy
Tel: 5624 3900
Visit www.gippsdairy.com.au
