Fonterra : Pay delay squeezes 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.”

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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.”