Surveying Low Farm Income Cycles

We are now heading into a period of lower milk prices off the back of very high milk prices in 2022 and part of 2023.  With input prices not falling at the same speed there could be significant pressure on business cashflows this winter, especially as there are likely to be some large income tax bills for January 2024.

With this in mind, it is important not to sit back and rely on the good year just gone.  Successful businesses continue to focus on how to become more efficient and sustainable when prices do drop.

Dairy NZ detail 10 disciplines to focus on during these times:

1. Understand your current and medium financial position.  What is the immediate cashflow requirement and when is the business likely to become cash positive again.
2. Once you know your financial position through budgets identify the areas you need to focus on.  Is it increased income, reduce cost of production, deferred payment terms, change debt repayment structure or inject capital?
3. Identify if you need help with any of the points in number two, e.g., your accountant, consultant, or bank manager.
4. Profitably increase your income.  Spending your way out of a lower income cycle is unlikely to be the answer, whereas managing your way through the cycle and planning is more likely to lead to success.
5. Focus on cost of production.  High milk prices can lead to inefficiencies, as the focus drifts away from cost of production as the higher income masks rises in input use.
6. Look at capital expenditure.  Can this be put off for one or two years without impacting on the business profitability?
7. Review your debt servicing costs.  Is there scope to re-structure your debt over a longer period or perhaps move to interest only for a short period?
8. Is there an opportunity to inject capital into the business from a partner or through sale of an asset that is not required?
9. Don’t delay making decisions.  The sooner you make those decisions the sooner the benefit comes and the pressure eases.
10. Only use delaying payments to suppliers as a last resort.  It is better to have a discussion with the supplier over payment terms before purchasing and agreeing terms.

Not all of the above will be relevant to every farm.  The most important point is to understand your current position, plan the way forward and then discuss any requirements with your bank and suppliers in plenty of time.

For help or an initial discussion with any of the above areas, please contact Phil on 07798 673665 or e-mail pcooper@fcgagric.com.  Don’t wait till the cashflow crisis hits!