Dairy farmers need to be careful they don’t waste an extra $1.50 in their milk payout likely coming their way, while sheep and beef farmers need $100 a lamb to break even, says Christchurch agricultural accountant Pita Alexander.
The likely payout increase for the 2013-14 season would be extremely healthy for farmers depending on their milk solid production and whether they increase their expenses, said Alexander, director of PS Alexander & Associates.
He said dairy farmers should allow for increased income tax.
«The message for the dairy people is don’t waste the $1.50. It’s so easy to waste it. If you say to your wife your income has gone up and you can spend a bit more your expenses rise to meet income, and it’s hard concrete and fast-setting concrete.»
The Fonterra payout was raised to $7.80 a kilogram of milk solids in an August forecast.
Alexander said sheep and beef farmers, in contrast, do not have the income to waste.
«For some years on average the sheep and beef group hasn’t had an income tax problem. What they have had is a lack of profitability problem.
It looks as though we are going to have about two million fewer lambs available for sale in the current season and while Australia may fill some of the gap this scarcity issue may hold up values.»
Alexander said most sheep and beef farmers needed an average lamb receipt – including prime and store lambs – of about $100 a head.
This was about $15 to $17 higher for many farmers than the season ending June.
For many sheep and beef farmers their total term debt would be about $500,000-$800,000. Debt varied widely, but for dairy farmers it would often be 8-10 times higher than for sheep and beef farmers.
Average sheep and beef equity for farmers would be a «surprisingly high» 75-80 per cent, even though profitability and their return on capital would be low.
Dairy equity might be 50-60 per cent although their cash flow and profitability was much stronger to service higher debt.
Many Canterbury owner operators of dairy farms with a 800-1000 herd would have term debt of about $6-8 million. Nationally, agricultural debt was $50-$51 billion.
Alexander said debt reduction on farms would be lower than most people thought.
«There has certainly been a tidy up with farm overdrafts and plant and a few family costs, repayment of student loans and the like but significant term debt reduction on the average New Zealand farm, dairy and sheep, has been relatively low.»
Alexander said meat companies would have a major problem ahead as they worked to tidy balance sheets and provide sustainable prices for sheep and beef farmers.
He said company margins were thin and they were carrying quite high fixed costs with the usual risks of securing supplies and dealing with seasonal variation and a high exchange rate.
«I think the total term debt of all of the New Zealand meat companies combined is of the order of $700 million and they had a big loss overall in the previous season, so they will have a major dilemma about wanting to tidy up their balance sheets significantly and yet probably wanting to get the average lamb payout to their clients up to at least $100 per head – this could be quite a juggling act.»
He said farmers had to commit to one company so they and companies could forward plan at least a year in advance as the spot market forced the meat companies to focus on stock procurement rather than market development.
Banks were unlikely to be excited about almost $1000m lent to meat companies.
The Alexander family has created two annual scholarships of $10,000 each for studies benefiting agriculture at Lincoln University.
The first scholarship holders are science graduates Travis Ryan-Salter and Laura Buckthought.
Source: Stuff
