Costs, tax and inflation all impacting
"Absolutely breathtaking" is how well known economist Cameron Bagrie describes the current rural inflation rate of around 15%.
Fonterra's forecast milk price being reduced from $7 to $6 per kgMS means volatility is part of everyday life and dairy farmers will be conservative when making farm decisions this season.
DairyNZ economists estimate the reduced payout could cut national income by $1.8 billion this dairy season – an average per farm loss of about $150,000 (based on 2013/14 milk production).
DairyNZ chief executive Tim Mackle says for many farmers, $6/kgMS is a break-even payout, meaning little capital expenditure or principal payments will take place in 2014/15.
"While it is unclear where prices could be at the end of the season, volatility requires farmers to be prepared to react to changes quickly," says Mackle. "Now is obviously a good time to look at updating or developing a cashflow budget based on a $6 per kgMS milk price.
"Look at where the fat can be trimmed and where efficiency gains can be made, for instance growing and utilising more homegrown feed and looking at where supplementary feed can be reduced."
Farmers should also look at what contingency plans are in place for a possible dry summer – perhaps early culling and once-a-day milking, rather than supplementary feed. And with large tax bills looming from last year's record season, farmers should also contact their accountant to re-calculate their tax.
For more information on budgeting, visit www.dairynz.co.nz/budgets.
