Being price-takers, not price-makers, farmers have to gamble with the markets. Story by Karen Trebilcock.
I once interviewed a farmer who complained his son was “gambling” on the sharemarket but the son had replied straight back it was the father who was doing the gambling.
And the father had to admit his son was right. Farmers can control neither their costs nor how much money they make, and the weather is always there to throw in a curve ball as well.
It’s a wonder any of us do budgets.
We can’t control our costs because each of us are so small on the global and domestic market we are at the mercy of fuel companies, electricity providers and fertiliser sellers.
We can’t control how much we make from our meat and milk because, although many of us are part of co-ops, those co-ops do war in international markets. We are price takers not price makers, even though we produce food and everyone has to eat.
And the weather always has been, and always will be, forever changeable. If every year was dependably dry we could farm to it easily but even dry areas have wet summers keeping us on our toes and wondering where to stack those extra bales made.
It makes us question whether we should farm for the best years or the worst years. Having not enough mouths to eat the grass versus having to buy in feed when it doesn’t grow.
And while most money traders and fund managers would throw up their hands in horror, we stand in the howling nor-wester watching the grass we have sown, fertilised, irrigated, mowed and raked ready to be baled now lining our fences and the neighbours’ and shrug our shoulders.
So what can we do?
That budget, and yes you must do a budget, is the starting point. Every line of it should be thought of as an opportunity to cement in figures.
It used to be all about the payout – if the payout drops to this much could you survive? With rising onfarm costs, this year has changed all of that. It’s no longer about the payout but the breakeven point.
It doesn’t matter if we get a record-breaking $10 or more this season if our costs are nudging past it.
So focus on your costs.
Get the highlighter out and find the costs you can negotiate and lock in for the rest of the season.
These will include electricity, dairy chemicals, grain and insurance, leases on land and grazing.
There is nothing you can do about local government rates and ACC so ignore them.
You are at the mercy of freight and fuel companies but talk to your vet and see what they can do.
Animal health and supplement-making can blow out depending on the season’s weather so that’s about how good a farmer you are. Again, not much help.
And fertiliser companies charge what they want to – there is no negotiating there. Although you can always switch to a different product and they know that.
Apart from rates and ACC, there is arguably not one cost in your budget that you have to pay for. You can buy a solar system or a diesel generator for power, grow more grass instead of buying grain, use bulls instead of AI, forget herd testing and walk instead of taking the motorbike.
And all those companies selling you products know that and they will up the price until it breaks you and you leave the tractor keys inside. Don’t let it get to that stage. Simply say no to the higher prices. It is the easiest way to stop inflation.
Looking at income as well. Nothing can be guaranteed but again there is a lot you can do.
Lock in contracts for your surplus calves with rearers. Do the budgets and work out how to maximise income from them.
How much you will get for your culled cows at the works, even if you can get them in, is guess work but instead find more profitable options to sell them.
And then there is the biggest line in your budget, the one with hopefully lots of zeros.
Fonterra and other companies are great at forecasting the payout, and then dropping it and even a few cents change will cause havoc. New Zealand farmers are completely exposed to the world market. Arguably no other business of our size operates where there is no floor price.
And unlike in other countries, if things go bad, our government will not help us out of the mess, even though we make up most of its export earnings.
Fonterra does not manage the milk price for its shareholders. The price the farmer gets comes directly from the fortnightly Global Dairy Trade auctions.
What it does do is hedge the price of the milk it uses to make its commodities. Fonterra is both a seller and a buyer of milk. To make its cheese and butter it buys the milk and the price it pays is not the GDT price but the price it has hedged on the futures market.
So, if your co-op, which you own, is playing the futures market, then maybe you should look at it too.
Talk to your accountant and they will put you in touch with a broker and the tools. Yes, it is gambling, yes you are trying to predict the future and sometimes you will win and sometimes you will lose but you won’t break.
If you concrete in as much of your costs and your income as possible then inflation, weather, whatever is happening in the Ukraine, will have less of an effect on your business.
Find out your risk profile. Can you survive breaking even or making a loss? Can your business shareholders (your equity partners, the farm you sharemilk/contract milk on, your sharemilker or contract milker) survive or will they bring you down with them?
Knowledge is always powerful. And play the game. Running a dairying business, whether as a farm owner or a sharemilker or a contract milker is not about milking cows. It’s about making sure you can continue to milk the cows.
