Debt soaks up milk payout

Fairfax Media

SERVICING DEBT: The average New Zealand dairy farmer will use one-quarter of the season's milk payout to service interest payments on loans.

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The average New Zealand dairy farmer will use one-quarter of the season's milk payout to service interest payments on loans.

Dairy farms, which produce about 1.4 billion kilograms of milksolids a year, are exposed to banks by about $28 billion. This means the average debt is $20 for each kilogram of milksolids produced.

At a 7.5 per cent interest payment, that costs each farmer $1.50/kg a year to service their debt or 25 per cent of a projected $6.05 Fonterra payout.

However, dairy farmers would be able to decrease interest expenditure in future years by reducing their principal from the extra revenue they received as a result of the payout forecast rising from an initial $4.55/kg to $6.05/kg, said DairyNZ Tight Management campaign leader Rob Brazendale.

Average debt servicing of 25 per cent of gross income was probably acceptable to the banks, he said.

"It is the stuff at the margins that is the issue. There will be some who spend $2/kg and 30 per cent of their income, and they are more of a concern."

Most dairy farmers would now have a cash surplus, allowing them to repay some debt or retain cash to buffer less favourable years, he said.

Dairy NZ's Tight Management campaign was introduced to help farmers improve their profitability when the payout forecasts started at a low $4.55/kg. It promotes financial awareness, good cost control, timely decision making, high pasture use and a focus on cost-effective systems.

The industry-good organisation says sound management decisions are as valid as ever if farmers want to maximise the gains from the increased payout.

Brazendale said the profitability principles of a $4.55 payout still applied to a $6.06 payout. "Why spend money when you do not need to? We want to focus on profitability and cost effectiveness to go forward."

DairyNZ wants farmers to continue to focus on using pasture as the cheapest form of feed, rather than substituting cow diets with supplementary feeding except when they need to fill genuine feed gaps.

Brazendale said dairy farmers had concentrated on being more cost- effective since the low-payout start to the season and the test would be if they continued to take this position for a strong financial result.

"If you are putting supplements in when you do not need to, you are wasting grass and that is when your costs of production will go up."

He said farmers had to be careful of "marginal analysis" when they looked at the returns from adding supplementary feeding.

Often other costs are not factored in, such as the fixed cost of grass which has already been paid for but not used.

Brazendale said good management principles also applied more than ever because of the volatility of milk markets, with farmers not knowing where prices would go to next.

He said banks were commercial businesses and it remained to be seen how the volatility would affect their approach to loan formulas.

- © Fairfax NZ News