Farmers urged to budget and plan for new season
The Waikato is milking again. Fonterra's Te Rapa and Hautapu plants have fired up and the tankers are rolling again. Andrea Fox asked how farmers can make 2012-2013 a successful season.
"Budget and plan, plan, plan" are the watchwords for this dairying season say industry advisers, as calving in the Waikato gets under way and the white gold starts flowing again.
DairyNZ regional team manager Craig McBeth said farmers are feeling reasonably "positive".
They ended last season on a high note with good grass growth and have reasonable amounts of supplementary feed on hand. Many cows are recording half a body condition score higher than the comparable time last year, which augers well for mating in the coming spring.
But McBeth is cautioning farmers not to be complacent.
"They need to feed their cows as fully as possible to maintain that (improved body condition) through to mating. "Cashflow will be quite tight and they need to plan for that. This will be a poorer income year."
McBeth said a lower payout forecast for the 2012 year means cashflow will be lower in August and September than last year. Even though interest rates are low and 2011-2012 milk production was high farmers will have increased tax bills to consider and extra Fonterra shares to pay for out of 2012 year payout.
"There's profit there from last year but farmers need to plan (have a budget)."
Accountant Peter Hexter, a director of CooperAitken of Matamata and Morrinsville, said with the payout forecast down $1.40/kg milksolids on last season, it is important for farmers to budget, plan and monitor this season, and to work closely with their accountant, bank manager and farm advisor.
In presentations to farmers, CooperAitken has warned that on 100,000kg of milksolids, payout income this season for a farm owner will drop by $187,000.
Talking to your accountant about this season's tax needs is a good start, Hexter said.
Tax obligations will be different to last season and signing up for the Government's income equalisation deposit scheme to average out tax payments could be helpful.
"It's really important to do a budget. They need to understand the impact on the total business of a lower payout."
Advances this season will be lower at $3.85/kg. Budgets should be monitored monthly, he said.
Farmers needed to understand the underlying difference between a budget for cashflow and planning for profit.
"Create a budget based on the forecasted payout and understand the implications this has - does it affect your overdraft arrangement, does it produce the result you want, and will you have enough personal drawings?
"Test the volatility. What happens if feed costs or interest rates go up. If this season's weather affects production. Know in advance where the sensitivities are and share this with your bank, accountant and farm advisor."
Cashflow should be tracked month on month to see where the cash is going. If the plan shows any issues, Hexter advises discussing early with the bank.
"Challenge yourself to get a better result. Look for areas of improvement in your budget."
Hexter said according to CooperAitken figures for 2011, interest rate payments comprised about 21 per cent of total farm expenses. Feed costs were 18 per cent and fertiliser 8 per cent.
Farmers need to recognise feed costs are climbing regularly, he said.
"They need to think about return on investment. Look at the price of feed. I saw farmers at Fieldays forward booking feed, though I wouldn't say forward book all feed in advance. It's also about being aware what you should be paying for feed."
On fertiliser costs, Hexter recommended soil testing to first establish fertiliser was needed. Independent advisor and software programmes could help here.
Sitting down regularly with the bank was also advisable. It could improve a farmer's position in the eye of the bank, and get debt paid down more quickly. Bankers like constant information, not surprises, Hexter said.
"Look at every expense, line by line. Find efficiencies, sell off inefficient machinery, look at grazing costs and areas like leasing or buying bulls.
"Look after staff. The average stay by a worker on a farm is 1.6 years. Train them, your labour will help you save money too."
Consideration should be given to delay spending on capital assets, and repairs and maintenance.
Monitoring costs against industry averages was also good advice.
Last year animal health costs per dairy cow were $98 - up from $77 in 2009, Hexter said.
"I have clients whose animal health expenses range from $40 to $130 per cow. This is an area that can be looked at."
Other tools for successful farming in tight cashflow times were finding ways to grow income and increase production per cow.
Fuel rebates were available to farmers. Scrap steel around the farm could be sold, along with excess assets such as spare tractors, and beach houses and cottages could be rented out for extra income.
Hexter reminded farmers that interest is payable on shares bought from Fonterra under deferred payment.
"And make sure if you buy extra shares to do the production."
He urged farmers to keep a close eye on personal spending, which could easily blow out.
"Work out what you need to live on."
Hexter said he was positive about the dairy industry's prospects and "things can change very quickly" for the better in terms of payout. "But budgeting and planning is just good practice."
Have an up-to-date budget
Have a no-surprise cashflow plan
Control your expenses
Discuss ways to help your bank to help you
Look at ways to increase your income
Proactive tax planning to minimise payments to IRD
Have a range of advisers for decision-making implications.
Source: CooperAitken Accountants