Ireland’s milk represents about 0.8% of global production, and irrespective of our scale or how much we expand, in general we are price takers, said Teagasc advisers at the recent Greenfield Dairy Farm Open Day in Co Kilkenny.
Therefore, the focus must be on putting the farm in the best possible position to deal with a volatile price, while availing of tools and mechanisms to stabilise price.
It must be recognised that most dairy farmers will this year experience a cash deficit, when they combine cash generated from the dairy farm with their drawings and tax.
In the shorter term, there is no magic bullet to sort out all farm problems in a low milk price year, other than try to generate adequate family drawings, and to protect the long term potential of the farm business.
As long as the industry maintains its competiveness, it is likely that periods of low milk prices will be relatively short lived, because the low milk price will cause a supply correction in the least competitive industries.
All costs should be considered, for potential savings, and the impact of reducing each input should be assessed.
Prioritise savings in cost areas which have limited effect on long-term productivity. For example, in a low milk price year, the margin in producing milk from purchased feed will be negative, so aim to match the stocking rate to grass growth potential.
Sell older or late calving cows that may not have a long term future. Selling surplus livestock earlier rather than later reduces feed demand, and generates cash while reducing costs.
Investigate the potential to reduce fertiliser costs by switching from CAN to urea.
There is a justification for postponing all farm development in the short term to allow the business get over this time of depressed prices.
It is extremely important to be proactive with the bank in planning to get over short term issues.
Dealing with cash flow issues can be extremely stressful, and should not be dealt with in isolation by any individual. There are generally positive outcomes from sharing individual problems.
In the longer term, a focus on a high-EBI/crossbred cow in a system that maximises grass growth, matching grass growth and demand while minimising capital investment, will keep the overall cost base low, and is best placed to deal with price volatility.
NationalFarm Survey data show that maximising grazed grass utilisation and minimising purchased supplementary feed use will maximise profit per hectare and per kg of milk solids produced.
Nationally, there is huge scope for grass utilisation, and reducing bought-in feed.
This requires the right type of robust cow to convert grass to milk efficiently, and to withstand short term fluctuations in feed supply, with a low replacement rate and reduced labour requirement.
Cash flow budgets must be used to identify particular deficits within and between years, and to plan financing for expansion, and cash management.
Budgets must cater for increased debt servicing costs during expansion, alongside reduced productivity, and in many cases, investment from cash instead of from borrowings.
Budgets will identify potential pitfalls and opportunities. For example, seeking a moratorium on capital repayments of bank debt could make the process viable. Or securing short- term finance can overcome cash deficits, as occurred on many farms in the spring of 2013.
At least every quarter, cash flow budgets should be compared with actual cash flow from bank statements.
Farm tax accounts for 2015 should be completed immediately and used as the starting point to create a financial picture for 2016. Then a source and application of funds for the 2015 accounts can be used for the 2016 projections, coupled with changes in milk outputs, milk values, livestock sales and any cost category changes.
A short-term cash flow budget should include all cash revenue and costs, capital and interest payments, family drawings, and a provision for tax. Budget conservatively; underestimate production and the milk price, overestimate expenses.
Increasing milk solids is a key strategy to cope with volatility.
Nationally, the increase in solids concentrations between 2000 and 2015 is worth €161m annually to farmers, or 2.5c/l (assuming a base milk price of 29c).
On the greenfield farm in Co Kilkenny, the option to fix some of the milk price has been availed of since 2011, and has resulted in an overall higher milk price, by a significant margin in any individual year.
Another key strategy to manage volatility is to create a cash reserve when milk prices are high.
But this requires having the taxation structure of the business set up in an efficient manner to allow creation of cash reserves.
Such structures operate in Australia and New Zealand, and are needed in Ireland and across the EU, in order to manage volatility.
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