Strategies for a Lower Payout

October 1, 2014

Strategies for a Lower Payout

Financial cycles are a normal part of agriculture, subject to international factors beyond farmers’ control.  Farmers need sound business strategies to deal with these fluctuations, to ensure their long term future.

Large companies used to such cycles, tend to build up equity during positive cycles, and reduce it during negative ones.  Released equity is used to help cover costs of running their businesses during periods when product prices are lower than their production costs.  This ensures they are in a position to regain any losses when prices improve.

An alternative strategy is to cut costs and production to minimise losses, break even or stay profitable, in the short term.  The most common items targeted for cuts are bought in feed (includes minerals) and fertiliser.   Cutting feed costs could include purchasing cheaper feeds or not purchasing any feeds.

Cheaper feeds may seem an attractive option, but may provide less value.  If so, then they may prove to be a false economy.  Cutting feed inputs is likely to result in lower production, thus reduced income.  It is important to calculate the marginal return from the purchased feed to assess whether targeting lower production is sensible.  Fixed costs by their very nature cannot be changed very quickly, so the lower the production level, the higher the proportion of fixed costs per unit of output, which may prove counterproductive.

An important point, often overlooked, in short term cost benefit calculations, are the longer term carryover effects of any sudden changes in strategy.  One of these is cow condition and its influence on fertility.  High empty rates are probably the biggest financial drain on the dairy industry, and the effect of feeding and condition score are being studied by Dairy NZ.

Costs of empty cows and loss of income from calves need to be factored into any calculations of altering bought in feeds.  The longer term effects of reductions in fertiliser inputs may be, reduced pasture production in subsequent years, which may require higher bought in feed costs to compensate.  Opinions vary as to how soon any cutbacks in fertiliser take effect.

Another problem of cutting back feeding and production, may be a limited ability to respond to any improvement in market conditions, as happened a few years ago, when a number of farmers were not able to benefit from the improved payout.  This is still a possibility this season.

As featured in NZ Dairy Farmer

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