Dairy prices down as are costs
Dairy prices are easing but cost inflation is down across the board, providing some relief to farmers.
It's not in anyone’s interest to see customers fail, says Westpac’s head of agribusiness, Mark Steed.
Liquidation or receivership is a very last resort, he says, commenting on the downturn in the dairy industry.
Steed says Westpac representatives are talking with farmers and advisors including their accountants to help them re-budget and make sure the new budgets are transparent and realistic.
It’s obvious most farmers will have negative cashflows and these will range from more than $2 million for larger enterprises to about $300,000 for the average moderate to small scale operation.
“We and farmers are in this together; we have been increasing the level of contact with our customers,” he says. They want to ensure the customer has got a viable cost operation. They look at budgets and making sure the assumptions are realistic for the ongoing viability and sustainability of that business.
“It’s about challenging the assumptions so for example if you have got a high cost model operation with supplements and fertiliser going in, it is not as easy as just turning the tap off. This is about saying what can customers achieve with a lower cost model and how appropriate is that for them to be challenged on that. It is a bit of paradigm shift and we have to ask those questions.”
Steed says the key to sorting out the financial position of a farm is the willingness of farmers to engage in a positive dialogue with the bank and show a willingness to re-cut their business model with a view to future sustainability.
Those that won’t engage with the bank, other creditors and stakeholders will find they lose the support of these people and this could end up being a significant problem for them. Banks are well placed to deal with a downturn and have been planning for this.
“For the last three to four months, we have been training and educating our staff to deal with these difficult situations and to be able to have difficult conversations with customers,” he says.
“Remember that many of our bankers are also farmers so it’s a bit of double edged issue whereby they are equally feeling the stress and the strain of dealing with the issues at home as well as having to go out and see their customers who are going through fairly torrid situations. So sitting around the table is a very stressful environment to deal with.”
Steed says Westpac’s ambassador, rugby great Sir John Kirwan, has been travelling the country talking about how to deal with depression. Up to 500 people have come at some venues.
Highly geared at risk
Steed says the most at-risk farmers are those that are highly geared and were struggling even when the farmgate milk price was relatively high.
For some their business model was always unsustainable. But Westpac is putting in place plans to help all its farmer customers.
Steed believes the days of an $8/kgMS plus pay-out are gone, but the present pay-out of below $4/kgMS is equally an aberration. The future normal pay-out will be somewhere between $5-6/kgMS, he says.
“There has been a real focus in the dairy industry on increasing production on an annual basis which has been complemented by higher pay-out levels,” he says.
“Post GFC a number of businesses have had to adopt different kinds of cost models and look to how they going to cut their cloth according to their businesses. Dairy farms are no different and will have to take a microscopic view of every facet of their business.
“As a result they’ll have to consider what is the sustainable operating model.”
For help visit www.depression.org.nz
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