The dairy industry is no stranger to volatility. Dairy payouts have consistently fluctuated between seasons, and farmers have been in these situations before and have continually found ways to navigate the hard times. Now, more than ever, farmers need to understand the levers that can be pulled to help mitigate the impact on their business. So, what must your farm business do to build resilience, weather this storm, and position yourself to reap the benefits of the next potential uplift?
Firstly, it’s important to remember that volatility in the dairy industry is cyclical. While historical performance is no guarantee of the future, milk prices have recovered from market dips in the past. The graphs below show the volatility over the past 15 seasons and how dairy payouts have fluctuated.
Source: Dairy industry payout history | interest.co.nz / KPMG Graphics
Resilience is built by understanding and mitigating the impacts of the dairy payout fluctuations on your farm business. Developing a long-term strategy must include diversification, cost reduction, and risk management. Budgeting and forecasting will help you understand your position, how your business is tracking, where your cash flow peaks and troughs are, and, therefore, your position at the end of the season heading into the next financial year. Understanding this is the first step in formulating a strategy for the future.
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Focus on what’s within your control
A good place to start is reviewing historical financial information and understanding what core spending is, what can be cut back or deferred, and what the alternatives are for your business. The farm expenses index graph below shows that farm working expenses (All Inputs line) have been increasing, particularly over the last two seasons, in line with on-farm inflation and interest rate hikes. Although a payout of $6.75 in 2024 is not low in historical terms, increases in expenses and high interest rates are the key factors putting pressure on farm businesses.
Interest rate movements (aside from taking fixed rates) are beyond our control, but farm expenses can be managed. While no one enjoys cutting back, cost reduction in times of volatility can present opportunities, create efficiencies, and help improve your bottom line and position your business for success. The 2023 KPMG Agribusiness Agenda report highlighted an increase in anxiety in the sector. Focussing on what is within our control is one way to build resilience and stay the course.
Source: Information releases | Stats NZ / KPMG Graphics
Evaluate your scenarios
Once your budget is established, you must formulate a plan that aligns with the forecasted result. What are your options? What scenarios are on the table? What are your trigger points for enacting your plan, and can you articulate this to your business stakeholders? This plan will be the key discussion point to have on the table when talking to your business stakeholders, whether this is third-party shareholders or your bank. Ensuring this strategy is realistic, achievable, and backed by accurate financial information is important to get the desired outcome for your business.
Establish your break-even point
There has been some generalisation about the break-even payout for a dairy farmer in the current environment. However, we know it's not that simple - every farming business has a different system, structure, and debt level, leading to differences in individual break-even points. So, by better understanding your own business and numbers, and working through these to understand your break-even position, you can better take control of the situation and lead your bank and stakeholders through your plan to mitigate the pressures.
Engage a trusted advisor
At this point, engaging early with experienced professionals is crucial to help navigate challenging times. A trusted advisor can provide valuable insights and guidance on your business's best course of action. Whether it is assisting you to navigate discussions with your bank or exploring alternative financing options, a skilled advisor can help you identify opportunities and mitigate risks.
Volatility in the dairy industry is not new, and neither is resilience. Farmers have been in these situations before, and we as a sector have much to look forward to in the longer term. Understanding the impact on your farm business by assessing your current position, engaging early with experienced professionals and developing a strategy or plan that ensures your business has the flex to navigate through difficult times will help you weather the storm and position your business for future success.
Disclaimer
The views and opinions expressed herein are those of the author and do not necessarily represent the views and opinions of KPMG, a New Zealand partnership and a member firm of the KPMG global organisation of independent member firms affiliated with KPMG International Limited, a private English company limited by guarantee.
The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act upon such information without appropriate professional advice after a thorough examination of the particular situation.
