Dairy farms have seen significant variations in cashflow in their businesses since the spring of 2022.
Farm input costs rose sharply over this period with feed, fuel fertiliser and energy prices increasing significantly. Output prices for milk and livestock also increased significantly in 2022 with milk price peaking in December. This helped to maintain and, in some cases, increase profit margins on dairy farms in 2022. However, the milk price paid to farmers in recent months has reduced significantly while input costs have not reduced at a similar rate. This has resulted in a ‘cost of farming’ squeeze. There is a real risk if input costs are not kept under control that farmers that may see profit margins shrink over the coming year.
Now is an opportune time to review the on-farm cash situation and plan ahead knowing the milk price is lower and that the input cost base is still elevated. It is vitally important that farmers do all they can to manage their business costs at this time. A useful tool that dairy farm businesses can use is a Cash flow planner.
Cash flow projections should be carried out for the next 12 months to determine whether action is needed to ensure adequate funds are available to cover higher input costs.
Cash is essential for farms to operate and meet monthly running costs. Cash flow is simply the movement of money into and out of your business. A cash flow budget should include realistic estimates of the level of production, prices and timescales. Cash is needed throughout the year but is not spread evenly across the months, as there are certain times when large expenses such as conacre or a contractor bill must be paid. Also keep in mind that if higher profits materialise this usually means that tax bills will also be higher. Speak to your accountant to discuss the options available.
Whilst looking at cash flow, it makes sense to review all expenditure, to ensure it is both absolutely necessary and good value for money. A good starting point is to review your farm bank statements over the last year and use this to plan ahead. Ask yourself, what, if anything can be done without.
A cash flow budget highlights times in the year when borrowing money may be necessary to keep the business going until sufficient income is generated. It also shows when peak borrowing will occur. This allows you to identify your maximum requirement for finance. A bank overdraft is ideal for short term, flexible borrowing, but not for longer term or fixed borrowing. CAFRE has a cash flow template.
Finally, consider postponing major expenditure until prices improve. High interest charges and finance costs just add to the strain in difficult times.
Be aware of your overdraft situation and talk to your bank manager early if you are likely to exceed your overdraft limit. The earlier financial issues are discussed, the more options there are to help resolve them.
Individual farms should identify essential and non-essential spending and prioritise areas where there is a return on investment such as animal health and welfare, feed efficiency and soil management, for example liming.
Protecting the core business should be paramount in volatile times so having a healthy herd and fertile soils will improve long term resilience and enable the business to avail of improved market returns in the longer term.
Overall, there remains significant uncertainty around both farmgate prices and input costs and how this will impact farm businesses. It is vital to look ahead, assess your cash flow and make a financial plan now.
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