Fonterra : Pay delay squeezes cashflow
Fonterra’s
decision to hold back the value return payment until October, and to
make no advance increase until after June has sparked serious worries
about cashflow.
Federated Farmers Dairy chairman Lachlan McKenzie
estimated dairy farmers could have to fund $800 million-$1 billion
through their overdrafts.
“At the end of the day farmers are the lenders of last resort for the cooperative,” he said.
The
co-op’s $5.10/kg of milksolids (MS) forecast is made up of $4.65 as a
base milk price, down 95c on the previous forecast, and 45c value
return, up five cents.
Normally the value return would be paid in
two tranches, in April and October, but the April payment is to be
deferred until after the annual payout is set.
By mid-February,
Fonterra had not announced what the new advance price might be after
June, creating anxious times for farmers and their financiers.
National
Bank general manager, rural, Charlie Graham said his staff were busy
working with farmer clients to determine where they could cut costs or
reschedule spending.
“Where applicable they’re looking at
restructuring debt and moving overdraft to term debt to free up their
overdraft capacity for further on in the year, when cashflow will get
tight,” he said.
A lot of farmers’ costs were committed in the first
half of the season and, for those with a high debt level, the big drop
in payout would create significant pressure financially.
Federated
Farmers criticised banks for not dropping overdraft rates in line with
the Reserve Bank’s cuts in the official cash rate (OCR). Graham said
bank overdraft rates hadn’t dropped to the full extent of the OCR cuts,
because banks funded their lending from a variety of sources which were
1.4-1.5 percent above the wholesale rate.
In general, banks were bearing a proportion of the additional cost of funds and bank margins were declining too, he said.
McKenzie
said farmers were looking at any way they could lower their cost
structures. He knew of owners not renewing sharemilking and management
contracts, but returning to run their farms themselves.
Most farmers
would cut back spending to ride out the drop in payout, but new
entrants and those with a lot of debt would find the coming months
“very tight”. Sharemilkers with high debt will be hit hard if they
bought cows at the high of more than $2500/cow, as prices have dropped
to around $1,500 – $1,800.
Any tightening in liquidity would be
likely to add to a growing portfolio of farms for sale, putting more
pressure on land prices, so banks would be treading carefully to
protect the value of their security.
FarmRight farm investment
managers Cameron Glass and Ross Cottier said reviewing budgets meant
going back to the tried-and-true low-cost, pasture-based Kiwi model of
dairying.
Glass said budgets and cashflows were being re-done to
reflect the $4.05/kg MS advance remaining until June. It would be June,
July and August, when winter grazing bills were coming in, that the
real pain could be felt.
For a 200,000kg MS farm, the delays in
payments would mean around $100,000 worth of income held back until
October. But the 500-cow farm would be facing wintering costs of around
$88,000 for eight weeks if it was priced at $22/cow/week.
Cottier
said some indication of likely payout next season would help farmers
manage their way through. FarmRight had no new conversions confirmed
for start up in June 2010, down from the 10 conversions due to start
milking in August this year.
The cost of capital was at the lowest
rate he was likely to ever see, which could add around 80c/kg MS to the
bottom line of some farms.
“So it’s not all doom and gloom,” he said.
“Medium to long term, dairying is still looking very positive.”
Work forward on $4.50 payout
Farmers
should be doing their figures on a $4.50/kg milksolids (MS) payout next
season, according to DairyNZ consulting officer Don Urquhart.
He
told the Aka Aka discussion group, south of Auckland in mid-February,
that adding 40c/kg MS for stock sales to Fonterra’s forecast payout for
this season, farmers were likely to receive $5.50.
Last year,
DairyNZ estimated drought-hit North Island dairy farmers had costs of
production of $4.86/kg MS, compared with previous season’s $3.63.
This
figure includes drawings and depreciation but not interest, which could
add another $1. With on-farm inflation expected to be half of last
year, operating expenses could average $4.23 or $5.23 with interest
added.
He urged farmers to aim as near $3.80 costs as possible.
“If
you have high debt have a plan B. If there are asset sales you will
lose equity and in the environment we’re in now, that can happen very
fast.”
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