Preparing for a (Lack of) Rainy Day

Paul Duynhoven and our +MORE agri teams are available to help with cash flow forecasts and revisions to give you peace of mind when it comes to your dairy business. Please reach out if you have any questions about the following.

Positive Outlook for 2024-25 Fonterra Dairy Payout
$10 sounds great, right? While there’s still some uncertainty, it’s clear that the 2024-25 Fonterra dairy payout will be better than the 2023-24 one.
However, spring was tough in many parts of the country with wet and cold weather. This led to less grass growth, damaged pastures, higher feed costs, and often lower production. As a result, summer has started with lower levels of feed supplements on hand since there wasn’t enough pasture growth to make silage.

Financial Relief for Dairy Farmers
On the bright side, with a higher forecast payout for the current season many dairy farmers have received bigger advances earlier from Fonterra. Additionally, drops in the Official Cash Rate have led to lower interest rates. Some borrowers are now paying about 2% less interest than they were a year ago on floating rates. While other farm costs remain high, the drop in fertilizer prices has helped some farmers.

Managing Cash Flow
I’m not suggesting you hide cash under your mattress, but the current Fonterra payout structure means you’ll only get the current advance rate for milk sent from January until August 2025, when the next increase in the schedule rate happens. The December milk cheque received in January is larger ($8.50), but after that, managing cash flow will be crucial. For traditional spring calving farms, milk payments will decrease from February to June as production declines. If you dry off before May, you won’t have any payments coming in June or July.

Autumn Expenses
Autumn can be expensive for some farmers with maize harvesting costs, capital fertilizer applications, and ongoing tax obligations. This might require terminal tax payments or larger provisional tax payments, which can strain bank balances. If you’re unsure whether you can cover these costs without asking your bank for an overdraft increase, it might be wise to check your budgets now.

Potential Risks
If the milk price drops significantly the advance rate could be overpaid in a worst case scenario. We’ve been there before unfortunately. However, I believe Fonterra will deliver, though final season payments from August to October might need a trim if the payout declines. If payout were to drop then advance rate increases might be delayed, with the next increase being paid in September instead of August as scheduled.

Preparing for Summer Drought
For those without irrigation or still relying on some rainfall, a summer drought could be both a practical and financial challenge. Many parts of the country are drying out and need rain. Persistent dry conditions could lead to large feed bills to keep cows milking or drying off early, resulting in reduced or no income until August. With ongoing costs and winter grazing for some, there are many bills to cover.

Cash is King
Cash is king, and being mindful of this will help your dairy business through cash flow pinches and potential droughts. There are other drought mitigation strategies on the farm, but having cash available gives you options.

Christmas Wish
This Christmas, don’t ask Santa for a new John Deere under the tree. Instead, ask for 20-30ml of rain on Christmas Eve and 20-25ml (or 25-30ml) weekly thereafter. Hope isn’t a strategy, so unless you want to feel like Old Mother Hubbard with an empty cupboard, save some cash for (lack of) rainy days.