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A typical southern dairy farm, with 500 cows, has had its potential income this season slashed by $300,000.
And changes to the advanced milk payment made by Fonterra has squeezed cash flows. In early spring, many farmers committed to spending based on a forecast advanced payout of $5.95 per kilogram of milk solids, but this has since been reduced to $4.05.
Southland farm consultant Alastair Gibson said he made his $300,000 calculation based on a typical 500- to 550-cow farm producing 200,000kg, and on the difference in income from $6.60 a kilo forecast by Fonterra in September and the present forecast payout of $5.10 a kilo.
Sharemilkers have not only had their income halved but also their equity, as cow prices have fallen from $2500 each last year to $1300 each.
And Mr Gibson said banks were tightening up on lending and overdraft arrangements.
He said the economic environment was such that dairy farmers needed to cut farm working expenses to $2.80 per kilo of milk solids produced.
They were last at that level in 2004-05.
The Ministry of Agriculture and Forestry estimated farm working expenses last year were $3.31 a kilo, but Mr Gibson said he knew of some farms at $4.40 a kilo, which included some capital expenditure.
For some farms, a break-even point could be $4.70 a kilo, allowing for debt servicing of $1.58 a kilo and working expenses of $2.80 a kilo, and then additional costs such as personal drawings and tax.
The sudden reduction in milk payout at the start of this season meant many farmers were committed to or planning for high grazing, fertiliser and fuel costs.
There was also some evidence of companies ramping up their charges, and while some costs have since fallen, so has income.
While Fonterra was forecasting $5.10 per kilo this season, Mr Gibson said farmers needed to decide if that was sustainable.
Dairy NZ has forecast $4.60 next season and Westpac $4.50.
Mr Gibson said farmers had two ways to balance their books: cut costs or increase the amount of milk produced.
To reduce costs, he said farmers needed to plan carefully, and to look at their 2004-05 budget for guidance.
"It is difficult to do, but if you own your budget, you can do it on your own."
Dairy NZ field-extension manager Dave Miller said while dairy product prices had fallen, the recession meant the industry was in uncharted territory.
"This makes it harder to predict the extent and length of the downturn, and is also having an impact in terms of the banks being significantly more cautious in lending the capital they have."
Assuming a $4.60 payout for 2009-10, cash income would be lower than for each of the previous two seasons and potentially 50c a kilo lower than this year alone, meaning a lean year for an average Otago-Southland dairy farm.
After meeting farm working expenses and debt servicing, Dairy NZ estimated an average Otago-Southland dairy farm would only have 17c for every kilo produced to meet tax obligations, debt reduction and capital development.
Dairy NZ economist Matthew Newman said all farms would be reducing work costs in line with the lower payouts, and he believed the main areas where spending would be cut would be feed, grazing-off, fertiliser and repairs and maintenance.
Mr Miller said feed use and cost were areas farmers should look at carefully, asking two questions: how much it cost and how well it was used.
"On many farms this is the single biggest area where detailed analysis should be done in order to make significant gains in profitability."
Labour costs were another large cash liability, but in eight months the focus had shifted from finding quality staff to keeping them in the industry.
"Quality staff are a key feature in keeping control of costs and operating the farm efficiently."
Mr Miller said the dairy industry was heavily indebted and had moved to a higher cost structure.
It was vital farmers understood the current position of their business, including the extent and cost of debt and its profitability.
"Banks are not big on surprises. Individual farmers need to understand their cash position, forecast to the best of their ability the cash position for the next 18 months and then communicate early and clearly just where things are at with their bank, and what their strategy for the next 18 months is."
Banks were not as flexible as they once were, Mr Miller said.
They were not as willing to extend or capitalise overdrafts as they were when land prices were rising.