Milk producers in Northern Ireland are being strongly urged to complete six-month cash flow forecasts on a regular basis.
This was one of the key take-home messages from a recent dairy farm finance meeting, hosted by the College of Agriculture, Food and Enterprise (CAFRE) in Co. Armagh.
The event was organised on the back of the extremely challenging margins recorded on dairy farms over the past couple of months.
CAFRE benchmarking specialist, Martin Reel, confirmed that the completion of a cash flow projection allows farmers to accurately assess the financial status of their ‘in the here-and-now’.
According to Reel: “In turn, this allows real management decisions to be taken. E.g., dairy farmers can choose to stick with the status quo – they can opt to cut input costs, or they might act to push the performance of their herds further in order to improve turnover.
“Cash flow projections also allow farmers to identify periods in the future when cash flows will be adequate, and why they will be coming under pressure.”
There was strong evidence coming from the meeting that relatively few dairy farmers prepare cash flow projections on a regular basis.
Meanwhile, the comparison with the attitude taken by pig farmers, where this matter is concerned, could not be more striking.
Cash flow forecast
CAFRE confirmed that the vast majority of pig producers in Northern Ireland complete a cash flow forecast for their businesses on an almost monthly basis.
It is also worth pointing out that farmers within this sector were facing consistent losses over a two-year period, up to quite recently. Yet, very few producers went out of business, despite this more challenging scenario.
The second take-home message from the meeting relates to the following assertion – it’s the small issues that can make a real difference when farmgate returns become challenging.
Milk quality is a case in point. Prices bonuses relating to fat and protein percentages mean little, in relative terms, when the base price is heading for 50p/L.
However, they take on a much greater significance within a falling milk price scenario.
It’s also the little things – where costs are concerned, that can combine to create a real challenge when the monthly milk cheques start to fall in sizes, e.g., bank interest and hire purchase charges.
Image source: Cliff Donaldson
“Only a farmer knows the true details of his or her business. This is why the day-to-day manager of a farming business is best placed to compile a cash flow forecast, not the accountant,” Reel added.
HSBC bank manager, Pamela Beattie, also spoke at the meeting. She confirmed that banks across the board are happy to take a long-term view when it comes to dealing with agriculture at an industry-level.
However, when it comes to dealing with individual farmer-clients, these institutions want to see hard evidence in terms of how these businesses are actually performing.
According to Beattie: “Banks will want to see cash flow projections when it comes to dealing with individual farmer-clients.
“There are numerous options available to the banks when it comes to supporting farm businesses through periods of challenging cash flow pressures.
“One is to extend overdraft facilities. Another is to switch to interest-only repayments on previously agreed loans.”
The HSBC representative acknowledged that most dairy farmers made strong profits during 2022/2023.
Capital projects
“On the back of this, many producers went ahead with capital projects, paying for these out of the then cash flow within the business,” Beattie continued.
“One way of addressing current cash flow difficulties, is to secure a retrospective loan on the work carried out, and use this money to help carry the business forward at the present time,” she said.
Beattie stressed that dairy farmers should always strive to keep a cash buffer ‘on account’ within their business.
This figure can amount to the value of one, or possibly two, monthly milk cheques.
She confirmed that farmers cannot be disadvantageously taxed in having relative large sums of money maintained in their bank accounts, as tax is only paid on recorded profits.
A final take-home message from the meeting was the need for farmers to keep merchant credit at an absolute minimum level.
