Dairy Input Finance
5 minute read
The dairy industry has seen significant change and experienced some extreme challenges over the past few years. These changes and challenges have put pressure on cashflow and financing options for many dairy farmers. So, with summer fodder and hay season fast approaching, this month we’re going to focus on finance and cashflow options available to dairy farmers to make feeding your herd a little easier.
Like other types of farming, there are a number of financing options to choose from depending on your own circumstances. Let’s start with the most common.
Like all types of agribusiness, the most common source of finance for dairy farmers is their bank. Generally speaking, support comes in two forms; term debt and overdraft. Term debt is most commonly used for land purchases or other long-term capital requirements. It is repaid over a number of years with principal and interest repayments usually made monthly or quarterly in line with milk payments. Overdrafts are fluctuating cashflow facilities used for working capital required to manage daily business requirements. Most dairy farmers would utilise both these forms of finance.
What are the alternatives?
For a bit of background, due to dairy farmers having the security of a monthly milk payment, milk processors and other dairy specific businesses have historically offered their producers access to finance. The reasons for this vary but the key ones include; ensuring milk supply through a financial obligation, helping producers grow their operations or assist producers to manage cashflow through tougher times. From the milk producers perspective, reasons for seeking alternative finance may include; the cost of finance, convenience, flexibility in milk processor, access to greater capital (than their bank may allow), access to unique capital, such as cows, and sometimes, lower barriers to entry.
Capital finance/growth incentives
This is where the milk processor supports a producer to increase their herd size or upgrade their operation. In turn, the producer agrees to supply the additional milk to the processor. Generally, these arrangements will be backed with a contract and require credit approval. These arrangements can also be supported by the producer leveraging shares or equity in the processor.
As with other types of farming, cashflow fluctuates with the season. In winter, milk supply is low and milk prices are higher. The inverse is in spring; milk supply is plentiful but prices are lower. Some processors can assist producers by smoothing their milk payments over the year, providing equal installments for ease of budgeting and cashflow management.
Advance payments are an arrangement where a processor offers cash payments in advance of supply to allow the producer to purchase production necessities (feed, machinery repairs etc) which exceed their monthly excess cashflow. Advance payments are recouped by the processor later in the year.
Herd (re)building finance
This is where a third party business assists producers to increase or establish their herds by purchasing (financing) cows on the producer’s behalf. This frees up cashflow now and allows the farmer to gradually repay the cost of rebuilding their herd while generating an income from the milk production.
Crop input finance – Agfarm Accelerate
Over the past 12 months, Agfarm has expanded its input finance program, Agfarm Accelerate, into the dairy industry. Agfarm Accelerate is a competitively priced line of credit for milk producers to purchase their winter and summer cropping inputs (seed, fertiliser, chemical, fuel), including feed supplements, grain, hay and fodder. Agfarm pay suppliers direct on behalf of the milk producer which ensures payment terms can be met and increases cashflow availability throughout the season. All credit facilities are repaid to Agfarm directly from the milk processor and you can choose any milk processor you wish to use. Accelerate is used in conjunction with other financial facilities, allowing producers to capitalise on opportunities when they arise. Finance terms run for a maximum of 11 months.
For more information on Agfarm Accelerate and how it can assist you to manage cashflow this season, reach out to your Regional Manager on the details below.
WA Regional Manager – 0439 625 853
SA Regional Manager – 0438 128 472
QLD & NSW Regional Manager – 0400 873 777
VIC Regional Manager – 0447 743 556