Dairy: Challenging times demand rigorous financial planning
The average 100-cow dairy farmer will see an estimated €25,000 knocked off his milk cheque this year. Trying to deal with this level of income loss without some sort of plan is a form of madness.
The average spring calving dairy herd in 2015 had a gross output of 32c/l, costs of 20c/l leaving a net profit of 12c/l, excluding own labour, according to the Teagasc profit monitor results.
With current milk prices, this net profit figure looks set to be at least halved in 2016, unless costs are drastically reduced.
For the majority of dairy farmers there is very little "fat in the system" to cut, but this year, all bets are off and every item of expenditure has to be looked at.
Many items may be small in nature, but a lot of small cuts can add up, some may add risk to the business, but that risk needs to be assessed. Others may cause long term pain, but if the money isn't there, then it isn't there.
I've completed many cash flow plans for farmers, and in years like this, all lines on the cash flow plan have to be examined carefully.
The headings (in the panel opposite) give an example of a very basic example of a cash flow plan which most dairy farmers should be able to make an attempt at completing.
When completing the cash flow plan under the headings, firstly enter all the figures for 2015, then estimate as best as possible what the 2016 figures are likely to be. If the bottom figure is a large minus, then you need to go back up through each line on the table and identify some realistic changes/savings.
Are there surplus stock which could be sold? Are you carrying "passengers" in the milking herd? It typically costs somewhere in the region of €1,000 to keep a dairy cow for the year. Any late calvers, high SCC cows etc could find it hard to pay their way this year. Getting rid of these passengers could reduce your stocking rate and allow more grass to be fed to the remainder of the herd for the rest of the year.
From now on, grass alone will support 27litres/cow/day. Feed 2kgs of meal for every 4.5l above this level. If cows are producing less than 27l and grass is plentiful, is there a requirement for meal? 1kg may be justified as a carrier for Calmag for the next few weeks.
Maximise slurry use as much as possible to grow grass this year and use urea instead of CAN when conditions allow. Many farmers are talking about using stock bulls instead of AI this year.
But does this add up? A test bull straw costs approximately €8, a strong beef bred stock bull costs somewhere in the region of €2,500. Yes the stockbull can be sold on, but you've tied up €2,500 out of cash flow until the end of the year.
We all hate extending loan terms as we are merely "kicking the can down the road". But if the money isn't there, it isn't there. All the major banks have schemes in place for years like this whereby you can opt to pay interest only for a short period of time. When dealing with banks, the key is to be proactive. You talk to them before they start talking to you. All the banks are interested in is getting their money back. If you can demonstrate a restructured model of payment that suits both parties, then the bank should accommodate you.
Complete your 2015 accounts now and know what your tax liability for October is going to be. Put a plan in place as to how you intend to pay this bill.
2016 is not the year to be completing capital works from cash flow. Reseeding 10ac will cost €3,000. Can you afford it? All building projects and new machinery should be postponed for six months at least. Did you spend a significant sum of money on capital works from cash flow last year? All the major banks are willing to retro-finance these capital projects into term loans.
Assuming drawings are already at a modest level, then no cuts should be made here. It was recently mentioned in jest at a discussion group meeting about cutting the family holiday.
The most important thing you could do this year is to go on a family holiday. Everyone needs a break away.
It doesn't need to be two weeks in the Bahamas but do take some time out to spend with family and friends. Mental health is more important than profit. Look after yourself and your family first and foremost.
Joe Kelleher is a Teagasc advisor based in Newcastle West, Co Limerick
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