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Cuts to base milk prices along with increased production costs have tightened margins and left cashflow under pressure on many dairy farms.
With autumn-calving dairy farms approaching the end of the 2018-2019 season, now is a good time to analyse financial performance over the past year and develop a cashflow plan for the year ahead.
Even in other systems, where it might be midway through the budgetary year, the current pressure on margins has meant it is important to revise cashflow plans with updated milk prices and production costs.
On farms where there has been no cashflow planning carried out at all, a useful first step is to pull together records of all receipts (income) and costs over the past 12 months to see when and where money came into and went out of the farm business. These records of transactions can provide the basis for developing a cashflow plan for the year ahead.
Cashflow plan
A simplified cashflow plan for a Dairylink Ireland participant is shown in Table 1. Milk sales for each month should be based on calving pattern, expected bonus payments and a realistic base price. This farmer has used 24p/l as the base milk price for the next 12 months, which is down from the 26p/l used initially in last year’s budget.
However, this will be revised and updated throughout the year.
Projected sales of calves and cull cows, as well as stock from any beef enterprises on the farm, should be included in stock sales. Basic Payment and other CAP payments are third and, in most cases, the final row of income streams. The three rows are then added together to give total receipts for each month of the year.
Concentrates
On projected costs, the main unknown is concentrate costs. This Dairylink farmer has used an estimated dairy nut price of £250/t for the 12-month period, although this will be updated as the year progresses. The amount of meal used each month is slightly less than last year as the farmer is aiming to make better-quality silage and more use of grazed grass in the spring, but this will also be subject to revision.
Other costs are listed in Table 1 and, in many cases, they mirror the records of costs from the previous year.
To save space on this page, we have merged most costs under the single row “sundry costs”.
This row includes costs associated with contractors, machinery, veterinary, AI, paid labour, straw, electricity, repairs, land lease, accountancy fees and loan repayments. These should ideally be in individual rows to create a long table so that the effect of each item on monthly cashflow is clear.
Total costs are tallied up and subtracting from total receipts for each month. The change in cashflow is then added or subtracted to the bank account balance for the previous month.
A sensitivity analysis is also a useful exercise to see how changes will affect cashflow. For example, a 1p/l change in base milk price equates to £750 for the example farmer during the peak production month of November and £5,750 over the course of 12 months.
On the costs side, every £10/t change in meal price equates to almost £2,000 over the year for the farmer and a similar change in cashflow is seen by every 0.01kg/litre change in feed rate.
Taking steps to address cashflow pressure
Comparing the bank account balance in July 2019 to June 2020, the Dairylink Ireland participant is going to make £7,547 over the course of the year at the projected costs and receipts.
The cashflow plan shows that an overdraft will be needed in September before milk sales start to increase in October and peak in November.
The budget outlined does not include costs associated with capital investments which may be partially or fully funded from cash reserves. A key benefit of cashflow planning is being able to see if spare cash will be available at certain times to make these investments.
If finances are looking tight in the projection, farmers could examine options to restructure their cost base to see how it affects cashflow. The decision may be taken to delay any capital investments until milk prices improve and surplus cash is generated from the business again.
Investments
For phase two Dairylink Ireland participants, investments are still being made which aim to make businesses more sustainable in the long term. This means spending money in high-return areas, such as improvements to grazing infrastructure to lower costs associated with bought-in feed.
Programme participants still want to continue with their capital investment plans, so a short-term loan may be the best option for funding if cashflow is looking tight down the line.
An up to date cashflow plan is needed now to allow informed decisions to be made about managing farm finances in a few months’ time.
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