Making the most of the forecast milk price - don't blow the budget

The budget was set back in April. Have you looked at it since? This season we have the opportunity to make financial progress on farm.

By Debbie Kinder, FarmWise consultant.

When this article was written, the Fonterra milk price was forecast at $6.75/kg milk solids (MS). Yes the final milk price may be above or below this, but the forecast has the potential to provide discretionary cash. Right now monitoring the season plan and forecast budget and cash flow is key.

Plan for a profit. Don’t wait till the end of the season to see what’s left, it may not be the result you had hoped for.

To be in business the cash flow needs to be strong enough to generate discretionary cash in the good years in order to build a stronger business for the years where milk price is lower. Cash equals choices. No cash equals no choices. One thing that doesn’t change with the cycle of milk price is the fact that the strength of your cash flow is critical to your business.

Key points about your budget:

  • A realistic budget aids good management. Too optimistic and you may lose sight of costs to achieve production, too pessimistic and you may miss opportunities.
  • To know what is achievable, benchmark your costs against industry information for your area. Check out DairyNZ budget case studies or contact your local farm consultant or accountant.
  • Farm Working Expenses (FWE): The average FWE for the 2017-18 season was $4.20/kg MS. FWE for the top 25% of farms was $3.80/kg MS. What are your FWE/kg Milk solids? Remember the majority of costs are adjustable and can be controlled.
  • Break-even milk price (BEMP). If your BEMP is not where you want it to be then make changes now. If you have a high BEMP it would be worthwhile reviewing your current system. If high debt levels are also a factor, make sure you are having regular communication with your trusted advisors such as your bank, accountant, farm consultant and mentors.

Table 1: New Zealand break-even Milk Price ($ per kg MS)

2017-18 Season

Farm Working Expenses

4.20

Plus interest and rent

1.31

Plus tax

0.26

Plus drawings

0.65

Total Cash Expenses

6.41

Less livestock and other dairy cash income

0.54

Break-even milk price

5.87

Source: DairyNZ Economic Survey 2017-18

Profit and a strong cash flow provide time and choices. Every area of expenditure can be analysed in relation to the goals and direction of the business. There are no surprises.

Try not to be tempted to chase marginal return unless it fits in with your business plan. Always ask the question is the added cost generating a direct return.

All decisions need to be based on the long term goal. Do not spend on additional resources unless you are making the most of what you currently have. This includes land, stock, staff, water, feed, machinery, etc.

For some the changes will be small, if at all, while for others it may be a big mind set shift. 

A strong cash flow takes planning and involves asking the hard questions of your current operation. Look outside the farm for benchmarking and ideas for improvement. Plan for a profit and free cash while sticking to the plan. Setting up a strong cash flow takes time to review and discipline to monitor and maintain.

Take the opportunity this season to drive the business, keep a close hand on expenses and generate free cash to build a stronger business for next season.