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Do You Have Enough Equity To Ride Out The Milk Price Storm?

Most, if not all farmers, are very aware of the impact of the mid-season drop in milk price, but how many have ‘crunched the numbers’ to see what it means financially.

By From the Department of Primary Industries - 21st April 2009 - Back to News

As it currently stands, a small number of farmers have been buffered due to the nature of their milk company arrangement – but most will suffer a significant milk income reduction compared to their earlier expectations.

The drop will effect all businesses in different ways – and one of the most critical questions to ask is, ‘Can my cash flow handle the drop now and into the next season and, if not, do I have the equity to finance the business through this tough period?’

Firstly, we should explore operational changes to see if we can minimise the damage. You need to determine how much you can reduce input costs before the operating margin is actually worse off? After this is done, a budget can then be constructed to see what the cash flow looks like.

Many farmers don’t keep a structured cash flow – the milk cheque comes in, the bills are paid, and in most cases there is still a bit left over. It’s just another job. Unfortunately, with the size of the current milk drop, many businesses won’t have enough coming in to cover what is going out.

We are in uncharted territory in many cases. Even after trimming the budget as outlined, the farm business may need to secure another source of finance to cover the deficit.

If you have a healthy equity level, you will normally have plenty of options. You can borrow against the equity to stay cash flow positive and spend what is required to set your farm up for the next season.

Some dairy businesses will be in a more difficult position. In some cases a number of tough years in succession have eroded equity.

In other cases the business is ‘young’ and, as with many young businesses, start out with low equity. Not many of us win lotto and have a huge deposit – we have to take a risk.

Whatever the circumstances, if you have low equity and are going to need more finance to get into the next season, you should seek some individual advice for your business.

A golden rule is never get to the point where someone else controls your assets. For each business there will a point where it is too risky (or impossible) to borrow more money.

In the extreme case, a business may be forced to sell assets to recover debt and unfortunately this will not normally be at a price you think the asset is worth!

The key message is that there are plenty of people who can work through your financial position and at least put things in perspective for your business.

With a return to good rainfall we may get through with little damage – but it’s worth considering the old saying, ‘if you fail to plan, you plan to fail’.

There are plenty of skilled people willing to help you work through your options – factory field officers, consultants, bankers, accountants and the Rural Financial Counselling Service.

It is important to contact the Rural Financial Counselling Service if you decide to exit the industry as they can help explore options.

Source: http://gippsland.com/

Published by: news@gippsland.com

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