Farmers cashing up assets

Otago dairy farmers are selling what they can to generate cash flow as they face up to an immediate prospect of lower milk payout prices for the next 18 months to two years.

Holiday homes, second cars and unneeded plant and equipment have been the first on the block but accountants contacted yesterday by the Otago Daily Times say more, harder decisions will need to be made by some farmers.

Fonterra will this afternoon announce what many expect to be a sharply downgraded milk payout forecast for the current season.

Crowe Horwath agribusiness principal Justin Geddes said dairy farmers were nervous about the payout and the latest drop in global dairy prices meant they were forced to consider their position.

Farmers he was dealing with were selling run-off blocks, although questions remained about who would buy them.

Holiday homes were on the market to provide equity for farmers in tight times. Any unwanted equipment was being sold.

''We are not at the point of people being forced to sell their farms. But we are looking at how to cope with the loss of income about 90% in the industry face.''

Everything surplus to requirements was being considered for sale, he said.

Farmers who had been grazing stock on run-off blocks had wintered stock on home blocks to cut costs and were putting in winter feed when they could to save money.

Herds were being trimmed by up to 10% as a short-term gain.

Older cows were being sent to the works as beef prices were ''very good''.

Mr Geddes estimated 75% of Otago dairy farmers had ''comfortable'' debt levels and the remainder had debt beyond industry norm.

That could mean farmers with a 300,000kg of milk solids-producing farm having about $6 million of debt.

Deloitte Dunedin partner Phil Stevenson said commodity prices were always volatile and that was part of farming.

However, recent volatility had brought price highs never seen before, followed by troughs never seen before - both coming in quick succession.

''Over the last 12 months we have had farmers having really quick wins. They have to look at costs that are easy to take out.''

Things like supplements had been taken out of play as production flagged, staff numbers had been cut and off-farm grazing had been curtailed, he said.

Selling stock was seen as a last resort, but some were close to that.

Artificial insemination was costly and being avoided by some farmers in the hope they could deal with the problem later down the track, Mr Stevenson said.

In Otago, there were extremes from ''very comfortable'' to ''extremely at risk'', with no middle ground.

''We have seen a lot of farmers expand and take on debt in recent years. New conversions have taken on a lot of debt to get established. They took on the debt with a budget of $6 to $7 a kg/ms.

"They knew they would never get $8.40 again but thought two seasons at $6 would see them through. That's not going to happen.''

Polson Higgs partner Michael Turner had a similar tale but said cash flow was the life blood of farming and when it dried up, farmers were forced to make some difficult decisions.

Dairy farms were high-cost business structures and they could not operate without paying fixed costs such as staff, electricity and rates.

He was aware of some farming families taking jobs outside the farm to generate cash flow, adding extra mental pressure to the partner remaining on the farm.

Banks, which had been patient, were starting to look at the cash flow and equity of farmers and trying to work out who owned the most in a farm - the farmer or the banks, he said.

The value of cows was pegged to the payout and the lower the payout, the lower the value of the cows.

That would hurt share-milkers, who owned the cows but had no land.

''Negative cash flow can be managed for a while but now we don't know for how long that will be. Banks see this as an aberration and they expect it to come right.''

The BNZ Confidence Survey, out yesterday, was described by chief economist Tony Alexander as ''dairy versus the rest''.

In the dairy sector, people were struggling for adjectives to describe their woe.

The survey results came in almost entirely before the latest dairy auction result this week.

''Dairy sector comments are astoundingly negative - except in one instance, the company focusing on value-added rather than build production. They are very optimistic.''

The farm servicing sector was showing weakness already in sales of tractors, farm bikes and farm machinery.

Capital spending was falling away rapidly but there were some people waiting to buy properties, he said.



At a glance

• Dairy farmers urged to keep in contact with their banks.

• Mental health seen as as important as financial health.

• Selling unnecessary assets will create cash flow.

• Off-farm jobs being taken by some farmers to generate cash.


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