Financial planning is critical in these times of farm volatility
Over the last 12 months, market prices for beef, grain and milk, have dropped by about 10%.
The causes of these price drops are many and varied, from near record world production of grain to the Ukraine-Russia crisis, the substitution of beef with other meats, and increases in production in milk across Europe and New Zealand, thanks to ideal grazing conditions.
Closer to home, the drop in prices can have an immediate and significant impact on farm profitability.
For a dairy farmer milking 70 cows, the relatively modest drop in milk price of 4 cent a litre can wipe 14,000 off farm profit in a full year.
Recent figures from the Kilkenny Greenfield Farm project updates put the cost of milk production on their farm in 2013 at 30.5 cent per litre.
This monitor farm was established back in 2009 with the target of producing milk profitably, assuming an average milk price as low as 24 cent per litre.
Their current cost base of 30.5 cent is substantially out of line from the original objectives, despite sticking to the main principles of grass-based milk production.
The figures from the Greenfield project allow us to take a basic starting point of 30 cent per litre as an assumed base cost for producing milk, and the recent drop in milk price from 40 cent to 36 cent therefore actually represents a 40% drop in profitability!
Of course each farm is different, and the cost basis can vary massively, depending on the production system, the level of borrowings, paid labour employed, etc, but regardless of what production method or cost base is involved, the drop in income is undoubtedly going to affect the bottom line.
At this stage of the year, itâs relatively easy to map out the expected farm income and farm expenses for the remainder of the year.
The milk cheques received over the last number of months are as good if not better that the milk cheques of the same period in 2013. For many dairy farmers, the ideal grass growing conditions for much of 2014 have resulted in a double digit increase in milk output, which has actually masked the drop in milk prices.
These benefits are short lived though.
All milk processors are predicting significant production beyond their quota levels, meaning additional supplies at this time of year are potentially displacing the opportunity to produce âin-quotaâ milk later in the autumn ( to see how this will affect you, examine your own quota situation carefully).
At this stage of the year, itâs worthwhile factoring in any expected loss in milk sales later this year, the loss in income coming either from earlier drying-off period, a reduction in milk production by reverting to once-a-day milking, or a loss in milk revenue due to superlevy fines.
At individual farm level, the expected reduction in income may impact on the ability to meet payments later in the year, and can result in pressure meeting tax bills arising from 2013.
From a budgeting point of view, it is worthwhile examining last yearâs incomings and outgoings.
Examine what income came in for 2013, tailor the figures for 2014, factoring in the adjusted price drops and the smaller volume of milk left to be supplied for the remainder of the year.
On the outgoings side, compare your costs for this year and last year.
Firstly, establish what costs were incurred for the second half of 2013, this can be done fairly quickly by writing out a list of all cheque payments made in 2013, and seeing whether similar payments need to be made for 2014.
This provides a handy reminder of the typical costs incurred on the farm.
Next, go through bank statements in order to get a handle on direct debits, interest and bank charges applied, loan repayments and personal outgoings.
Factor in changes for 2014, such as an increased tax bill, or any additional repayments arising.
Total all expected income and outgoings to determine the overall position for the remainder of the year.
Where a shortfall between income and outgoings is expected, consider your options.
Is there non-critical expenditure which can be deferred, such as building work, reseeding or liming?
Can loan repayments be restricted to interest only? Can income tax payments be reduced by opting for income averaging?
As a last resort, it is possible to avail of an instalment arrangement with Revenue (more on this in the coming weeks on this page).
Financial planning and budgeting is simply about examining your farm and your familyâs income, so that appropriate plans can be put in place to meet your financial needs.
If finance isnât your strong suit, it may be worthwhile checking if your accountant or agricultural consultant can help.
