Silver lining to gloomy payout
Opportunity to improve businessSUE O'DOWD
An Inglewood couple see Fonterra's lower payout forecast as an opportunity to improve their business.
Taranaki Sharemilkers of the Year in 2009 Paul Davidson and Lorette Astwood-Davidson are in their second season as 50/50 sharemilkers on a 140ha (effective) farm near Inglewood where they are milking 370 cows. Last season they produced 126,000kg milksolids.
"I'm sure farmers realise that despite the low payout, the dairy industry is still a good industry to be in," said Astwood-Davidson, who is an associate chartered accountant.
She had expected the forecast payout to drop and the couple saw the lower prediction as an opportunity to enhance their operation because it made them focus on their costs.
Fonterra has lowered its 2012-13 payout forecast to $5.65-$5.75, comprising a farmgate milk price of $5.25 per kilogram of milksolids, down from $5.50, and net profit of 40-50 cents, down from 45-55 cents per share.
Astwood-Davidson said despite all the messages to dairy farmers from DairyNZ and other organisations to plan their season, many still did not do budgets. Some did prepare one, only to put it in a drawer and never look at it again.
Not only should farmers prepare realistic annual budgets, they should also monitor them closely.
"That's what we do," she said. "We're flexible, but we try to be as accurate as we can. We look at our actual expenses against the budget."
Davidson sets out the items in the couple's budget because as the person working day to day on the farm, he's the one with the operational knowledge. "He knows what is needed in terms of feed, mating costs and animal health. My role is the coding and processing."
Farmers needing help to prepare a budget should talk to their bank, their accountant or to DairyNZ.
Astwood-Davidson said farmers should also review their provisional tax requirements on the basis of the revised forecast.
The couple were considering making an income equalisation deposit (IED) relating to the 2011-12 financial year, depositing the excess profit from last season's higher payout to withdraw in future when the payout or their income fell.
She said farmers who already had an IED might want to discuss with their accountant the possibility of withdrawing some of the deposit this financial year because the reduced payout could mean a lower income.
"For Paul and I, the IED scheme is a great way of smoothing our income between years. As with all farmers, it does fluctuate quite a bit."
But she said everyone's circumstances were different, so it was important people made decisions based on their own position.
She also advised farmers to discuss interest rates with their bank.
Backed by a strong budget, farmers could tell their bank why they needed a lower interest rate, she said.
They should seek advice on adopting floating or fixed rates.
Astwood-Davidson said insurance costs had risen markedly in the wake of the Christchurch earthquakes, so the couple were re- assessing their cover to ensure their assets were not over-valued.
They were also obtaining quotes from other companies.
She pointed out farmers could save costs by choosing a higher excess and paying an annual premium rather than quarterly or monthly.
Astwood-Davidson said farm owners with debt could delay capital expenditure that was not essential for the operation of the farm - like draining wet paddocks or installing new culverts. The viability of projects like new cowsheds could also be re-assessed.
Davidson said he hoped farmers would continue with riparian planting and fencing, which were important for the environment and stock welfare, as well as helping to improve the wider community's perception of farming.
"Riparian fencing and planting make managing stock so much easier. There's nothing worse than finding a cow in a creek. It's so unnecessary, it's easily solved - and the cost is tax deductible," he said.
The couple operate a low-input system, growing their own supplements and buying palm kernel. Last season they bought 60 tonnes of palm kernel expeller (PKE) and still have some from that contract.
"It's not worth buying PKE at the current price of $310 tonne, plus delivery, on the new payout," he said.
"Even at a $5.50kg payout, I wouldn't purchase it. PKE is not essential to our system and just fills slight deficits on the cusp of the season."
Every two weeks he undertakes pasture walks so he can react quickly if his herd needs extra feed. The farm's annual rainfall is 2500mm.
"It's been a kind winter - if wet - with consistent grass growth, no snow and not many fronts," he said.
A cost-saving measure he's adopting this season is maintaining his own machinery. Tradesmen have serviced his motorbike and tractor regularly in the past two seasons so he knows they're in such good condition that his basic approach will suffice. "I've got the time and the skills to do it," he said.
Last season he introduced rumensin drench for the first time, using it each evening in the cow shed to help cows' digestion and to prevent grass staggers and bloat. "But it's quite pricey and it's not really essential - especially on a low payout. It cost time in the shed and was a potential hazard for staff and for myself."
Instead he's drenching the colostrum herd morning and night and dusting paddocks with magnesium as a more cost-effective measure to prevent milk fever.
He has also decided to use semen from proven sires rather than pay a premium for DNA semen.
Other ways to save money could include early culling of stock and early drying off.
Astwood-Davidson suggested some farm owners and sharemilkers could also save money by not employing a calf-rearer. But employing a calf-rearer this season was practical for the couple because they have a 6-week-old baby.
She advised farmers to evaluate personal spending. As an example, the couple invited friends for dinner or organised pot-luck dinners rather than going to restaurants.
They would probably also change their plans to visit Raratonga next year and take a cheaper holiday instead. "But we'll still have a holiday."
Money could also be saved by limiting travel to town, particularly by avoiding impulsive trips, she said.
- © Fairfax NZ News
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