Farm Ireland
Independent.ie

Tuesday 17 January 2017

5 ways for dairy farmers to balance the books in 2017

Mary Kinston

Published 23/11/2016 | 17:00

'Unfortunately as milk prices recover, volatility won't disappear'
'Unfortunately as milk prices recover, volatility won't disappear'

We've all heard the mantra that 'cash is king'; however, after two sad years for milk prices, that old adage could be changed to 'cash is scarce' when applied to dairy farmers.

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While I have no doubt that dairy farmers will work their way out of the current cash-flow pressures, it does create stresses and strains on both the farm system and operator.

In the long-term allowing significant cash-flow pressures to develop is not a sustainable business strategy.

Unfortunately as milk prices recover, volatility won't disappear. So many factors influence supply and demand that achieving a sustained equilibrium that delivers consistent prices appears unlikely.

Therefore, it seems that we can't avoid these boom and bust milk price cycles. So as autumn heads into winter, it's now time to assess your financial position. This is both in terms of the costs of production achieved this year, bank balances (both assets and liabilities), stock numbers, and outstanding debts to merchants, co-ops, vets and the like.

Here are my top five actions for 2017

  1. Determine 2016 cost of production, and whether balances of current liabilities have increased or decreased since 2015
  2. Devise a financial budget for 2017 to assess potential cash surpluses
  3. Maintain and continue the discipline of a lowered cost of production in the 2017 season
  4. Bank a degree of cash by reducing merchant/co-op credit, overdraft balances, and pay preliminary tax up front. Consider saving a slush fund or achieve a bank balance target ahead of a seasonal deficit. These mechanisms will provide financial buffers for the future
  5. Spend sufficient time planning the total cost and opportunity to finance capital expenditure projects. Avoid spending capital out of cash-flow until the business has clearly recovered.

Subsequently, on the back of what was achieved in 2016, you should devise a 2017 budget with the aim of strengthening your financial position.

As the milk price shows signs of recovery, I ponder on what we should wish to achieve in 2017?

I also pose the question: what's more important in terms of financial performance - the milk price or the costs of production?

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Or is Mother Nature a greater force than price or cost?

Finally what do we need to do to provide financial cushions and long-term financial sustainability?

If we consider milk price, while it's not perfect, the reality is that farmers receive somewhat similar prices, give or take a couple of cent.

This couple of cent certainly affects the profit achieved and the cash surplus, but in general when the milk price is low, we're all in the same boat.

If we compare this to the situation in Britain, with a multitude of different buyers and contracts, the price paid over the last two years has varied by 50pc between farms.

No matter what you do on farm, there is no way to mitigate this level of difference in price.

So Ireland's more unified approach to pricing is a definite strength, and the fact that the pricing system encourages the farmer to operate the most efficient and profitable system is also a clear strength.

But, unlike Britain where you choose a supply contract, our influence on the price paid is limited.

With this in mind, I believe Irish farmers' focus should be on the cost of production, as this has a greater influence on the profit achieved and farmers can actually do something about their production costs.

In my experience dairy farmers have actually managed to reduce the cost of production during the downturn, though this has been assisted greatly by the fall in both feed and fertiliser prices in recent years.

It's no surprise that while milk prices have fallen by 25-30pc over the last two years, profit per hectare for the farmers I work with has dropped by just 9-10pc.

The profit achieved has also been greater or equal to the financial years of 2012 and 2013 when the price was good but the cost of production was significantly higher due to input prices and weather constraints.

Although these figures are dependent on the operator, land quality and region, this does highlight the significant the impact that a bad year can have on profitability.

So here's fingers and toes crossed for a good year in 2017 as it's certainly badly needed.

Mary Kinston is a discussion group facilitator and consultant, and farms with her husband in Co Kerry.

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