Financial Survey 2015 Southland Dairy This report summarises the results of a financial survey of dairy farms across Southland, carried out by AgFirst through June 2015. A description of the model farm is at the back of this report. KEY POINTS Climatically, the 2014/15 season was not a good one in Southland. Wet cool weather through much of the season, compounded by a dry February, saw pasture growth rates well below normal. As a result, production was down on most farms, by up to 10%, although the model records a 6% drop compared with 2013/14. The payout dropped significantly as the season progressed, ending at $4.40 per kilogramme of milksolids, resulting in a 91 percent drop in the Farm Surplus for Reinvestment compared with 2013/14. This is despite a significant deferred payout from 2013/14 helping to soften the within season payout drop. To counter the drop in payout farmers reduced expenditure slightly, with the model farm business essentially breaking even within the 2014/15 season, but then boosted by the dividend payment. The model is budgeting on a total payout of $5.25/kg MS for 2015/16 production. The low within season advance for 2015/16, coupled with a very low deferred payment, sees the model run at a significant loss in 2015/16. While farmers are budgeting to reduce costs, there is a limit to this, and most farms will run significant overdrafts through most of the season. The prospect of another low payout season sees farmer morale well down, as they face what could be a very hard year financially. In effect farmers will get through the year by eroding their equity. Table 1: Key Parameters, Financial Results and Budget for the Southland Dairy Model Year Ended 30 June 2011/12 2012/13 2013/14 2014/15 2015/16 Budget Effective area (ha) 212 n/a 211 212 212 Cows wintered (head) 609 597 610 604 Replacement heifers (head) 137 131 131 131 Cows milked 15th December (head) 561 582 595 590 Stocking rate (cows/ha) 2.65 2.80 2.81 2.78 Total milksolids (kg) 213 696 237 700 223 438 227 907 Milksolids per ha (kg/ha) 1 008 1,126 1,054 1,075 Milksolids per cow milked (kg/cow) 381 408 376 386 MS advance to end June ($/kg) 5.20 6.90 4.28 4.35 MS deferred payment 1.39 0.68 1.50 0.12 Net cash income 1 535 869 1 627 573 1 437 913 1 164 968 Farm working expenses 885 634 782 200 1 005 976 956 615 Farm profit before tax 379 341 465 340 66 889-202 895 Farm surplus for reinvestment 1 186 774 313 169 33 820-198 534 Note 1 Farm surplus for reinvestment is the cash available from the farm business, after meeting living costs, which is available for investment on the farm or for principal repayments. It is calculated as farm profit after tax plus depreciation plus stock adjustments less drawings. Sponsored by:
PHYSICAL FACTORS A relatively mild 2014 winter saw most farms calving down with good pasture covers. The spring then turned wet, with a mild patch through late September/early October which allowed some early crops to be sown. Wet weather returned in mid-october through to early December, which disrupted many farms getting crops into the ground. A dry February was followed by very variable weather from March into April. Quite a number of farms went onto either 16 hour or once-a-day milking from January onwards. This all resulted in a drop in pasture growth through much of the season, compounded by a reduction in pasture quality due to a lack of sunshine. With the payout dropping, farmers also generally hesitated to buy in supplementary feed, with many switching from higher priced compound feeds to cheaper Palm Kernel. The overall impact was a drop in milksolids production, with some farms down by as much as 10% compared with 2013/14. The average drop in production across the monitored farms was 6%, which is reflected in the model. The drop in payout also saw many farmers cull cows earlier in the autumn rather than buy in supplementary feed. Early submission rates at mating were generally down as a result of the poor spring, which will lead to a more spread out calving pattern in the 2015 spring. Farmers also report quite a variation in replacement heifers achieving target weights, which will impact on their future production. There is increased interest in growing crops, e.g. swedes or fodder beet for winter feeding, allowing the cows to be kept home on the milking platform. While many farmers made baleage through April-May, overall supplementary feed levels are tight. Most farms went into the 2015 winter with reasonable pasture covers and cows also in reasonable condition. The cold wet winter has seen a lot of supplement fed out, plus cow condition slipping back. In this respect many farms are heading into the 2015/16 season in only fair condition. FINANCIAL PERFORMANCE 2014/15 REVENUE DOWN Net cash income in 2014/15 was $1.4 million, down 25% compared with 2013/14, driven largely by the drop in payout compounded by the reduced milksolids production, but offset slightly by increased cattle income (up 23%). Many farmers also took advantage of the improved beef schedule to cull extra cows, which sees the model start the 2015/16 season 6 cows down (1%) compared with opening numbers. EXPENDITURE DOWN Farm working expenses dropped in 2014/15 by $7,100, or 1%, compared with 2013/14, with the main reductions being in supplementary feed (down 2.5%) and fertiliser (down 11%). The large deferred payment from 2013/14 helped buffer the reduced payout, and while farmers kept expenditure up on most items, they started reducing spending into the autumn as the effects of the reduced payout, and low deferred payment into 2015/16 became apparent. Total Farm Working Expenses (FWE) equated to $4.50 per kilogramme of milksolids, which is up on 2013/14, but due to the reduction in milksolids production rather than an increase in spending. On the monitored farms, FWE varied from $3.04 to $5.39/kg MS. Interest costs decreased only slightly, as the effects of interest rate reductions only began to be felt late in the 2014/15 season. The model paid $1.31/kgMS in interest, on a debt of $21.00/kgMS; within the monitored farms, debt servicing varies from $0.39 to $1.59/kgMS, while total debt varies from $13.00 to $32.00/kgMS. NET RESULT Farm profit before tax is down 88% compared with 2013/14, a direct result of the lower payout and production. As a result, tax payments are also down significantly. Personal drawings had been kept very similar to 2013/14 levels on average, but varied on the monitored farms from $0.10 to $1.15/kgMS.
The Farm Cash Surplus finishes the year in a breakeven position, down 100% compared with 2013/14. This is boosted by the dividend payment, meaning the model finishes the year with a slight surplus. With a very low deferred payment heading into 2015/16, and no deferred payment in August, many farmers are bracing themselves for a significant overdraft level heading into the 2015 spring. FINANCIAL PERFORMANCE 2015/16 REVENUE DOWN Budgeted nett cash income for the model drops by $295,300 or 21% compared with 2014/15, due mainly to the combination of the drop in payout and the very low deferred payment ($0.12/kgMS for the model). Income from stock sales is up slightly (2%) as many farmers are continuing to look at reducing cow numbers again in 2015/16. The monitored farmers were budgeting for an average 2% increase in production over 2014/15. Despite reductions in purchased supplementary feed, many are counting on an improved season in 2015/16. EXPENDITURE DOWN In anticipation of the impact of the low payout, the monitored farmers were looking to reduce farm working expenditure (FWE) significantly. Within the model, FWE in 2015/16 is down by $49,400 or 5% compared with 2014/15. There are reductions in many areas, with the main ones being: Supplementary feed. Expenditure on this (excluding grazing) is down by 21%. Bought in supplementary feed is down by 25%, offset by an increase (9%) in cropping as farmers look to grow more on-farm. Fertiliser. Expenditure on this is currently being held at a similar level as in 2014/15. This could well see some reduction in actual fertiliser applied as a result of the depreciating NZ dollar and resultant increase in prices. Repairs and maintenance. Expenditure on this item is budgeted to be down 20%, as farmers look to defer spending in this area. Other areas. There are a number of other expenditure items where farmers were budgeting to trim costs, including: animal health (down 11%), dairy shed expenses (down 15%), weed and pest control (down 28%), and vehicle costs (down 10%). On a per kilogramme of milksolids basis, FWE drops from $4.50 in 2014/15 to a budgeted $4.20 in 2015/16. While reduced farm working expenditure is an expected reaction to the drop in income, it remains to be seen whether such reductions are possible. It is difficult to significantly reduce expenditure on many items, as outlined above, without affecting the farming operation, and others such as fertiliser and repairs and maintenance can only be deferred for a limited time. Within the monitored farms, budgeted FWE varied from $2.39 to $5.06/kg MS. Total interest costs are budgeted to increase; an expected decrease in interest rates are offset by a combination of a large rise in overdraft levels and some hard-core seasonal debt being rolled into term debt at the end of 2014/15. It is anticipated that the overall cash loss for the year (approximately $154,500) will be rolled into term debt by the end of the year, thereby increasing again the overall debt position for the model. NET RESULT Farm profit before tax is negative (down 403% compared with 2014/15), meaning tax payments are zero. Farmers were budgeting for a reduction in personal drawings in light of the reduced farm income, which is reflected in the model. Few farmers were budgeting for expenditure on development, capital purchases, or principal debt repayments. Within the model there is some capital expenditure, which represents the purchase of Fonterra shares on a 3 year rolling basis. The cash deficit for the farm business for the year is $0.93/kgMS, offset to some degree by the share dividend, giving a net cash position for the year of -$154,500. This will increase farm debt; in effect farmers will get through the year by eroding their equity. Overall, the financial situation on-farm looks bleak for 2015/16, with concern remaining around possible reductions in payout, and/or the likelihood of higher farm working expenses.
Dollars Figure 1 Southland Dairy Model Trends in Profitability Graph 2 000 000 1 500 000 1 000 000 500 000 0-500 000 2008/09 2009/10 2010/11 2011/12 2012/13 2013/14 2014/15 2015/16 Year ended 30 June budget Net cash income Farm profit before tax Not Available Farm working expenses Farm surplus for reinvestment SENSITIVITY ANALYSIS With some uncertainty around payout, farm working expenses, plus the impact of debt levels, sensitivities around these factors are shown in Table 2 below. Table 2: 2015/16 Season: Net Cash Position sensitivities to various factors Payout $/kgms $4.00 ($3.31 advance to 20 June) Debt $/kgms $10 $21 $30 FWE $/kg/ms $4.20 $4.35 $4.50 $4.20 $4.35 $4.50 $4.20 $4.35 $4.50 Net Cash Position -$238,800 -$272,900 -$307,100 -$391,500 -$426,300 -$460,500 -$512,300 -$546,400 -$580,600 Payout $/kgms $4.50 ($3.73 advance to 20 June) Debt $/kgms $10 $21 $30 FWE $/kg/ms $4.20 $4.35 $4.50 $4.20 $4.35 $4.50 $4.20 $4.35 $4.50 Net Cash Position -$143,000 -$177,200 -$211,400 -$293,500 -$327,600 -$361,800 -$416,500 -$450,700 -$484,900 Payout $/kgms $5.25* ($4.35 advance to 20 June) Debt $/kgms $10 $21* $30 FWE $/kg/ms $4.20 $4.35 $4.50 $4.20* $4.35 $4.50 $4.20 $4.35 $4.50 Net Cash Position -$1,700 -$35,900 -$70,100 -$154,500 -$186,300 -$220,500 -$275,200 -$309,400 -$343,600 Payout $/kgms $6.00 ($4.97 advance to 20 June) Debt $/kgms $10 $21 $30 FWE $/kg/ms $4.20 $4.35 $4.50 $4.20 $4.35 $4.50 $4.20 $4.35 $4.50 Net Cash Position $120,000 $93,400 $62,800 -$10,900 -$45,000 -$79,200 -$133,900 -$168,100 -$202,300 * Current base model parameters BREAKEVEN PAYOUT A calculation is shown below of the breakeven position given current expenditure levels, plus an estimate of a maintenance situation for the 2015/16 year.
Table 3: Breakeven payout estimate ($/kg MS) 2014/15 2015/16 2015/16 @ maintenance* FWE $4.50 $4.20 $4.40 Interest $1.31 $1.31 $1.31 Drawings $0.29 $0.23 $0.30 Depreciation $0.13 $0.12 $0.12 $6.23 $5.85 $6.12 Cattle Income $0.39 $0.38 $0.38 Breakeven Payout $5.84 $5.47 $5.74 Within season payment $5.88 $4.47 $4.47 Difference $0.03 -$1.00 -$1.27 * This assumes full maintenance expenditure on-farm, particularly for farm working expenses. ISSUES REGIONAL IMPACT The changes in payout have had/will have an impact on the wider regional economies. The changes in aggregate farm income, compared to the previous year, is shown below: Table 4: Changes in aggregate farm income compared to the previous year ($ millions) 2014/15 2015/16 Payout ($/kg MS) $5.25 $4.50 $4.00 Southland -441-278 -411-501 ENVIRONMENTAL ISSUES Pressure remains on farmers to ensure that their effluent management systems are compliant. While most are, a number of consents continue to come up for renewal each year, resulting in costs of up to $100,000 plus in a number of instances to ensure compliance. Environment Southland is shortly to release its Water Plan, which will involve limits on nutrient discharges from farms, which in turn will involve expenditure on mitigation practices and/or changes in farm systems in order to meet these limits. LAND VALUES There is no apparent downward movement in land prices as a result of the drop in payout. Current expectations are that the market will be sticky as few farmers are looking to sell in the current low payout environment, while buyers are waiting to see which way values may go with the expectation of a downwards movement. There is some expectation that any reductions will be larger outside of the favoured central/eastern Southland area. LABOUR The labour situation remains similar to previous years, with a shortage of skilled workers, and good workers moving on rapidly to bigger and better jobs. There are few 50/50 sharemilking positions available, as farmers continue the trend towards variable order sharemilking, contract milking, or equity farming. DAIRY CONVERSIONS The drop in payout has seen a marked reduction in enquiry about dairy conversions, although a number will be coming on stream for the 2015/16 season. One impact of conversions has been a reduction in the amount of supplementary feed, usually pasture silage, which has come from sheep & beef farms. With the number of conversions in recent years, local supply has been diminishing.
Table 5 Southland Dairy Model Budget Whole farm 2014/15 2015/16 budget Per cow Per kg of Whole Per cow Per kg of milksolids farm milksolids Revenue Milksolids 1 312 865 2 206 5.88 1 018 207 1 726 4.47 Cattle 88 688 149 0.40 90 215 153 0.40 Other farm income 5 000 8 0.02 3 459 6 0.02 Less: Cattle purchases 2 600 4 0.01 3 200 5 0.01 Net cash income 1 403 953 2 360 6.28 1 108 681 1 879 4.86 Farm working expenses 1 005 976 1 691 4.50 956 615 1 621 4.20 Cash operating surplus 397 977 669 1.78 152 066 258 0.67 Interest 292 170 491 1.31 297 600 504 1.31 Rent and/or leases 0 0 0.00 0 0 0.00 Stock value adjustment - 9 930-17 -0.04-30 471-52 -0.13 Minus depreciation 28 988 49 0.13 26 890 46 0.12 Farm profit before tax 66 889 112 0.30-202 895-344 -0.89 Income equalization 0 0 0.00 0 0 0.00 Taxation 7 786 13 0.03 0 0 0.00 Farm profit after tax 59 103 99 0.26-202 895-344 -0.89 Allocation of funds 0.00 Add back depreciation 28 988 49 0.13 26 890 46 0.12 Reverse stock value adjustment 9 930 17 0.04 30 471 52 0.13 Drawings 64 200 108 0.29 53 000 90 0.23 Farm surplus for reinvestment 1 33 820 57 0.15-198 534-336 -0.87 Reinvestment Net capital purchases 33 762 57 0.15 13 147 22 0.06 Development 0 0 0.00 0 0 0.00 Principal repayments 0 0 0.00 0 0 0.00 Farm cash surplus/deficit 58 0 0.00-211 681-359 -0.93 Other cash sources Dividend on wet shares 2 33 960 57 0.15 56 287 95 0.25 Dividend on dry shares 2 535 1 0.00 890 2 0.00 Introduced funds 0 0 0.00 0 0 0.00 New borrowings 0 0 0.00 0 0 0.00 Off-farm income 0 0 0.00 0 0 0.00 Net cash position 34 553 58 0.15-154 504-262 -0.68 Assets and Liabilities Farm, forest and building (opening) 8 113 000 13 635 36.31 8 113 000 13 751 35.60 Plant and machinery (opening) 193 251 325 0.86 179 263 304 0.79 Stock valuation (opening) 1 111 889 1 869 4.98 1 101 959 1 868 4.84 Dairy company shares 1 361 994 2 289 6.10 1 112 295 1 885 4.88 Other farm related investments (opening) 0 0 0.00 0 0 0.00 Total farm assets 10 780 134 18 118 48.25 10 506 517 17 808 46.10 Total liabilities (opening) 4 695 000 7 891 21.01 4 935 000 8 364 21.65 Total equity (assets-liabilities) 6 085 134 10 227 27.23 5 571 517 9 443 24.45 Note: 1 Farm surplus for reinvestment is the cash available from the farm business, after meeting living costs, which is available for investment on the farm or for principal repayments. It is calculated as farm profit after tax plus depreciation plus stock adjustments less drawings. 2 Net of marginal tax.
Table 6 Southland Dairy Model Expenditure Whole farm 2014/15 2015/16 budget Per Per kg of Whole Per Per kg of cow milksolids farm cow milksolids Farm working expenses Permanent wages 180 985 304 0.81 181 130 307 0.79 Casual wages 2 234 4 0.01 5 369 9 0.02 ACC 6 895 12 0.03 5 533 9 0.02 Total labour expenses 190 114 320 0.85 192 032 325 0.84 Animal health 52 301 88 0.23 46 728 79 0.21 Breeding 32 725 55 0.15 32 568 55 0.14 Dairy shed expenses 11 305 19 0.05 9 558 16 0.04 Electricity 20 230 34 0.09 20 650 35 0.09 Feed (purchased + hay and silage) 157 080 264 0.70 118 000 200 0.52 Feed (feed crops) 16 660 28 0.07 18 231 31 0.08 Feed (grazing) 243 177 409 1.09 246 620 418 1.08 Feed (other) 4 463 8 0.02 4 720 8 0.02 Fertiliser 109 480 184 0.49 109 150 185 0.48 Lime 0 0 0.00 0 0 0.00 Freight (not elsewhere deducted) 8 806 15 0.04 9 611 16 0.04 Regrassing costs 11 603 20 0.05 13 348 23 0.06 Weed and pest control 3 749 6 0.02 2 715 5 0.01 Fuel 15 470 26 0.07 15 399 26 0.07 Vehicle costs (excluding fuel) 17 553 30 0.08 15 812 27 0.07 Repairs and maintenance 45 042 76 0.20 36 226 61 0.16 Total other working expenses 749 641 1 260 3.36 699 336 1 185 3.07 Communication costs (phone and mail) 2 678 5 0.01 2 419 4 0.01 Accountancy 6 545 11 0.03 5 900 10 0.03 Legal and consultancy 8 866 15 0.04 6 431 11 0.03 Other administration 5 534 9 0.02 4 956 8 0.02 Water charges (irrigation) 0 0 0.00 0 0 0.00 Rates 14 875 25 0.07 15 340 26 0.07 Insurance 12 495 21 0.06 12 685 22 0.06 ACC Employer 4 686 8 0.02 4 811 8 0.02 Other expenditure 1 10 544 18 0.05 12 705 22 0.06 Total overhead expenses 66 222 111 0.30 65 247 111 0.29 Total farm working expenses 1 005 976 1 691 4.50 956 615 1 621 4.20 Calculated Ratios Economic farm surplus (EFS 2 ) 274 059 461 1.23 9 705 16 0.00 Farm working expenses/nci 3 72% 86% EFS/total farm assets 2.5% 0.1% EFS less interest and lease/equity -0.3% -5.2% Interest+rent+lease/NCI 20.8% 26.8% EFS/NCI 19.5% 0.9% Notes: 1 Includes Dairy NZ levy. 2 EFS (or earnings before interest and tax) is calculated as follows: net cash income plus change in livestock values less farm working expenses less depreciation less wages of management (WOM). WOM is calculated as follows: $38 000 allowance for labour input plus 1 percent of opening total farm assets to a maximum of $85 000. 3 Net cash income.
INFORMATION ABOUT THE MODEL The Southland Dairy Model represents approximately 942 dairy farms across the Southland region. The model is a seasonal supply farm based on an average property of 212 ha, milking 595 cows and producing around 225,000-230,000 kg MS in a normal season. Heifers are grazed off the farm for 17 months. The model is created from information drawn from 20 surveyed dairy farms and a cross section of agribusiness representatives. The aim of the model is to typify an average dairy farm for the Southland region, and is assumed to supply Fonterra. The income and expenditure shown is on a cash in/cash out basis. For more information on the model contact phil.journeaux@agfirst.co.nz AgFirst Southland Ltd 280 Great North Road PO Box 85 Winton 9741 www.agfirst.co.nz Sponsored by: Disclaimer The content of this report is based upon current available information and is only intended for the use of the party named. All due care was exercised by AgFirst Waikato Ltd in the preparation of this report. Any action in reliance on the accuracy of the information contained in this report is the sole commercial decision of the user of the information and is taken at their own risk. Accordingly, AgFirst Waikato Ltd disclaims any liability whatsoever in respect of any losses or damages arising out of the use of this information or in respect of any actions taken in reliance upon the validity of the information contained within this report.