This year, the weather has been particularly challenging for farmers, leaving many short on grass and struggling to maintain their milk output. This has led to an increase in the need for feed, putting additional strain on already tight budgets. In light of these challenges, the importance of effective cashflow and budgeting has never been more apparent.
Philip O’Connor, our Head of Farm Support said:
“Cashflow is the lifeblood of any business, and this is particularly true for farms. If your profits are up in 2024 to date, consider setting aside some cash to help tide you over next year. If your cashflow is under pressure, review your loans and interest rates and look for opportunities to secure better value. Where available, consider using savings to support working capital if necessary. Other options to consider include delaying non-essential capital expenditure or seeking funding by way of a loan.
“A well-prepared budget can help you anticipate and prepare for future challenges, such as the weather-related difficulties that many have faced this year. If you don’t have a budget in place for 2024, it is not too late to plan one for the remainder of the year and into 2025. Working out your fertiliser, concentrate, and feed requirements will help you estimate what you need to budget for the remainder of the year. You must also look at your income sources and any other costs you expect to incur. Once you have this information, you will be able to produce a financial budget and predict whether you will be cash-positive or negative in 2025. And software, such as ifac’s FarmPro, allows you to track this budget against real-time income and expenditure to ensure you are always up-to-speed.
“If after completing your budget, you expect to be cash-negative after drawings, loan repayments and tax, you need to examine funding options. Now is the time to review cashflow and potentially look at funding options, not next spring if the farm runs into cashflow issues.”
In working with our clients regularly, what ifac is seeing is the variances we are seeing on costs and output. Dairy farmers are being hit from both sides concerning output and costs. In an unusual scenario, the firm is seeing overall costs per cow decreasing slightly but the cost per litre rising. This is due to the production dropping more than the overall total cost and therefore increasing the cost per litre.
Philip continued, “The other area we are seeing is the overall variance in costs in the sector from the mid-30-cent mark (circa €1,900 per cow) to over the 50-cent mark and climbing towards 3k a cow. Two factors are driving this, stocking rate and feed inputs. Overstocked farms are seeing spiralling feed costs and not getting an exponential return on output. This driving cost per litre and a very negative effect on margins. Every farmer regardless of their chosen system must have a sustainable number of cows for the available grass they are growing. This calculation is different on every farm but it is vital that every framer spends time examining their stocking rates and adjust accordingly.
“From a cashflow perspective if a cow is costing circa 2k a year and the majority of costs are incurred in the first 1/3 of the year the farmer needs to have adequate cash reserves carrying into the late winter / early spring. At ifac, we believe farmers need to have min. €200 per cow available cash (banked / overdraft) so as not to incur significant merchant credit balances in this period.”
In summary…
Cost and Output Variances: Dairy farmers are facing challenges with variances in costs and output. While overall costs per cow may be decreasing slightly, the cost per litre is rising due to a drop in production more than the decrease in overall costs.
Factors Driving Costs: Two main factors are driving costs in the sector - stocking rate and feed inputs. Overstocked farms are experiencing high feed costs without a proportional increase in output, leading to a negative impact on margins and cost per litre.
Importance of Stocking Rates: Farmers must have a sustainable number of cows based on the available grass they are growing. Each farm's stocking rate calculation will be different, but farmers need to evaluate and adjust their stocking rates accordingly.
Cashflow Management: From a cashflow perspective, farmers need to consider the timing of costs throughout the year. If a cow costs around €2,000 a year with most costs incurred in the first third of the year, farmers need to have sufficient cash reserves to carry them through the later winter and spring herd periods.
Recommended Cash Reserves: To avoid significant merchant credit balances, it is suggested that farmers should aim to have a minimum of €200 per cow available in cash (banked or through an overdraft) to support their operations.
“This year's weather has been particularly difficult for farmers, highlighting the importance of effective cashflow and budgeting. Your accountant and agricultural advisor can provide practical advice to improve the overall performance of your business and show you how your farm is performing when compared to similar farms in your sector. In Ifac, we always promote the concept of a ‘farming team’ where the farmer, accountant and agricultural advisor work together for the benefit of the farm. By bringing all of your professional advice together, you get a deeper understanding of your business, which enables you to identify and address potential problems, grab opportunities, and make the right decisions at the right time so that your farm can survive and thrive both now and, in the future,” Philip continued.
“It's clear that careful management of costs, stocking rates, and cashflow is essential for dairy farmers to maintain profitability and sustainability in their operations. Regular monitoring, adjustment, and planning are key to navigating the challenges in the sector.”