Forecasted Dairy Milk Pay-out will put pressure on moderate to high debt farmers

Recent international auction prices indicate a dairy pay out below $5.00 per kg of Milk Solid due to the trifecta – high exchange rates, high supply and low demand. The exchange rate needs no explanation. Maybe the current highs are the new norm? Russian sanctions mean European milk production needs to find another home increasing supply and competition in the markets we traditionally supply and China’s large inventory stocks means lower demand. This will place some financial pressure on any dairy farmers with moderate to high debt.

It is widely predicted that the 2014/15 pay-out will be around the $5.50 per kg of Milk Solid mark including dividend. With Farm Operating Expenses before depreciation per Milk Solid averaging more than $4.80 in the Bay of Plenty this only leaves 70c per Milk Solid to cover Interest and Owner Drawings. Let’s forget about a Return on your Farm Investment for now!

Average debt per Milk Solid in the Bay of Plenty is around $17 which means the Interest Expense alone may take $1 of your hard earned proceeds leaving a shortfall of as much as 30c per Milk Solid before Owner Drawings. It is clear dairy farmers are going to need to draw on some of the cash surpluses they made last year or maybe re-borrow some of the debt that was repaid. Thankfully the long term outlook is still up around the $6.50 mark.

There is no doubt that the forecasted low Dairy Milk Solid pay-out will provide some financial stress to those Dairy Farmers with moderate to high debt. Working with your advisors to extract the maximum benefit out of Cash Flow forecasts, Income Equalisation Deposits, Provisional Tax estimates and Benchmarking will provide some comfort and tax relief for farmers.