Keep purchased feed costs to 5% of milk payout

09-02-2009 | Not Specified

Lower cost pasture-based systems are likely to be more profitable rather than those that have become reliant on costly bought-in feed, says Dunedin-based consultant Peter ONeill.

He says the drop in dairy payout is not unexpected. What has surprised farmers and caught them unaware is the magnitude and speed of the drop in the forecast. When this is combined with the incessant creep that has occurred in farm working expenses (FWE), farm cashflows can be challenging.

While dairy farmers have no control of the payout, they do have control of costs of production.

Before Christmas, Westland Milk alerted its shareholders of the drop in its forecast for this season from a range of $5.20-$5.60/kg MS to $4.10-$4.50/kg MS. Last season it paid suppliers $8.29/kg MS.

Last season Fonterra paid $7.90/kg MS, in 2006-07, $4.35/kg MS and 2005-06, $4.10/kg MS.

O'Neill says Fonterra's average payout for the past seven years is $4.86/kg MS. While yet to be banked, a payout of $5 or better this season is still above average.

O'Neill suggests costs of production (farm working expenses) regardless of payout should be no more than 50-55% of payout. He also adds that a lid needs to be kept on buying-in feed costs; they should be no more than 5% of payout.

He suggests dairy farmers look again at their stocking rates and concentrate on their strengths, which includes growing grass and doing the basics better. This includes maintaining an optimum balance between pasture production, stocking rates, per cow and production/ha, and the levels of inputs.

"For some, additional profits will come from accepting lower per cow, per hectare production at a lower input cost. Simply doing 480kg MS/cow or 1800kg MS/ha is no longer necessarily the most profitable."

O Neill urges farmers to keep lines of communication open, make the time to revise year-to-date, end of year projections and next year's budgets. Begin the new season's budget with zeros in each column.

Work through budgets and identify status quo and medium term breakeven points at full maintenance. Then identify breakeven payout and breakeven production levels.

O'Neill continues to encourage clients to set targets and strive for them, but not at any cost. Knowing the various breakeven points of any business and what drives them is a valuable exercise and are useful tools when working through options. They help drive planning and business strategies. Benchmarking your business against others is another valuable exercise and identifies opportunities.

Keep track of performance throughout the year and stay in touch with your banker, accountant and consultant.

If farmers have not already done it they should review provisional tax payments and livestock taxation options and their impact.

Discuss the merits of which livestock taxation options, herd scheme and/or national standard cost (NSC) fits your plans.

Farm owners and sharemilkers who have increased herd numbers may have the choice of electing herd scheme or NSC values. One issue can be the requirement to give Inland Revenue two years notice in writing of an intention to change or plan to exit the herd scheme.

Last month's fertiliser price adjustments and another downward movement in mortgage interest rates will offset some of the drop in income. O'Neill suggests those locked into higher interest rates should discuss with their bankers the worth of breaking some fixed mortgages.

Nutrient budgets should be revised. Consider soil testing and making informed, strategic and tactical use of all fertilisers including nitrogen (N) fertilisers. Spreading effluent over a wider area of the property may be an option to lower fertiliser costs. Another is just applying maintenance.

Animal health-wise, adopting SAMM plan recommendations (strategic use of dry cow) at drying off may be more cost effective than using blanket dry cow therapy. If mating records are accurate savings may be made by only pregnancy testing cows once.

Determine the need before drenching with an anthelmintic, and if required consider the costs of using a pour on anthelmintic compared to an oral treatment. When controlling lice the use of a specific lice control treatment may be more cost effective than a combination type pour-on.

Closely question capital expenditure, is it really a need or simply a want? Keep plant replacement costs to a minimum. Maintain maintenance schedules of existing plant. Will plant due for replacement do another season? Consider using contractors and avoid having money tied up in expensive, depreciating machinery.

With this season's cull cow kill expected to begin earlier, avoid delays by contacting your company representative and booking works space for all cull animals. There is little point having them chomping their way through winter covers any longer than necessary.

The drop in cow values along with interest rates is an opportunity for young sharemilkers to move up to herd ownership (50/50 sharemilking) or expand current herd size.

Meanwhile the fall in Fonterra's share price may also create additional pressures for those planning to produce extra milksolids this season and having to share up at $5.57/share. The fair value share (FSV) for this season is $5.57.

This compares with Fonterra's December announcement that next seasons FSV would be $4.47, $1.10 less. Although this will have an effect on cashflow, O'Neill believes the increase in overall asset more than compensates for this cost.

He bases this on valuing a dairy farm at $40kg MS. However, those buying shares for a new conversion or planning to purchase an existing dairy farm the $1.10 drop in share price is to their advantage.

O'Neill says the drop in payout will lead to stronger business disciplines and more resilient businesses. As well as questioning where money is spent, he believes there is no better time than now to refocus on those areas of business that are performing and those where improvements can be made.

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