The rewards of financial discipline
Financial discipline encompasses more than budgeting, it encompasses understanding the intrinsic value of things, which is key for farmers considering dairy expansion, according to Irish dairy farmer Leonie Guiney, who along with her husband Kieran, farms 3,000 cows in the shadow of Mount Dobson, near Fairlie in New Zealand.
She was speaking at today’s Positive Farmers dairy conference in Clonmel, Co Tipperary where there is a record attendance of 475 people.
“Financial discipline comes with the regular habit of doing a simplified budget for everything we consider could be for sale,” she explained in her presentation.
“Regular budgeting gives you a clear knowledge of how your business can perform, allowing you to then easily evaluate options. With detailed knowledge of the financials of our business, we then make investment choices with confidence. But only if they will deliver an acceptable return on equity from profitable farming.”
In her presentation, she outlined key financial advice for farmers.
“Know how to estimate the right price. Refuse to overcapitalise in the development process. Know you have a farm system and the management that can deliver consistent profit at volatile milk prices.
“But I don’t believe you will embrace financial discipline unless you: see the choices and opportunities that being a sound financial manager creates; have the resources make it simple to do regularly good cash flow programmes; and stop doing all the things that you don’t need to be doing and do the ones that relate directly to achieving your vision.”
Guiney also outlined financials of their own farm businesses in New Zealand.
“In the financial year ending June 2013, with a Fonterra milk price of €3.93/kg milk solids (approximately 32 cents/litre) our four dairy farm companies average a cost of milk production including depreciation and management some 40 per cnet less than the average irrigated Canterbury dairy farm.”
Did this lower cost of production translate to higher profit? “Yes, we averaged an economic farm surplus per hectare €0.93/kgMS (8c/l) and €880/ha more than an average irrigated Canterbury farm, despite the fact two of our farms have no irrigation at all and are at 450m above sea level. On our 900 cow home farm with a manager on our cost of production, including staff manager and depreciation, was €2/kgMS (17c/l) and farm operating profit was €2.17.kgMS or 18 c/l.”
She explained that there were key lessons to learn.
“We produced less per hectare than average. We produced less per cow 381kg vs 418kgMS average. Our financial reward for all this ordinary output is a consistent ability to service debt at high and low milk prices.”
She continued: “We won’t be chasing extra milk with supplementary feed. We have no desire to increase our business exposure to the volatile cost of supplementary feed.”
In terms of cost of production, she said: “It is certainly higher than it was 10 years ago, all input costs have increased. But our farming system is significantly less exposed to purchased feed input costs than most New Zealand farmers and that is a huge difference.”
She stressed also that minimising the bottom line, maximising the top line delivers real returns and really gives you options when you keep repeating this behaviour.
On dairy expansion, she has concerns. “One concern I have is that being driven by expansion in itself is dangerous. Our progress was driven by a hunger for return on equity. We weren’t targeting land purchase, it showed up at the right price in the right location offering the right margin of safety. Then it kept showing up before others saw its value or understood how to mitigate the special risks the region has.
“I suspect that setting a target to own x hectares of land would be a very frustrating one to achieve in Ireland or New Zealand and might not be the right target if you want financial freedom. Who knows? Investment decisions must always be your own. But I can help you understand the principles that drive equity growth and it starts with simple budgets.”