Fonterra’s latest estimate of the dairy payout for the 2015/16 season is $3.85/kg milk solids. This comes off a record $8.40/kg for the 2013/2014 season. It is estimated the average dairy farmer needs $5.60/kg of milk solids to breakeven, so it goes without saying that financial upheaval is coming, but how significant and wide reaching will it be?
The extent of the impact is likely to go beyond discretionary commercial spending, on items such as infrastructure and new equipment, and extend to personal spending on items such as entertainment, transport and clothing. Rural communities across the country will feel the economic pressure. Banks will focus on highly indebted farmers, and some are likely to be forced to sell their farms. As the risk factor across the agricultural sector worsens, banks will adjust their margins across their wider lending portfolio (a means banks use to spread their risk) which could drive an increase in the cost of debt for all borrowers. The New Zealand exchange rate with the United States dollar has been consistently dropping over the past 18 months, in part being exacerbated by the drop in the diary pay-out, and this will cause the price of all imports to rise – private and commercial.
Despite the milk price dropping, it was a positive sign to see 126,063 people attend the 2015 National Agricultural Fieldays. That is over 6,000 more than last year. However, the true test will be what the revenue numbers will be for spending at the event. Last year, equipment sales of $369m occurred.
On the bright side, ‘dairy’ comprises 20 per cent of New Zealand’s exports, so although it is material, it is not the only egg in New Zealand’s basket. The remaining 80 per cent of exporters will enjoy the benefit of the lower New Zealand dollar. The tourism sector is also expected to grow as a result of the change in the exchange rate.
To survive, it is essential that all businesses that are reliant on the dairy industry ensure they are resilient and well prepared. Being proactive and talking to your banker and accountant early is key. Forecast cash flow and budgets should be reviewed and revised to ensure they are realistic. Further, methods for creating cost efficiencies should be implemented to ensure your business remains competitive…and survives.