Three ways farms can tackle financial challenges

While this year’s 1.77% milk price increase will definitely give Canadian farmers a boost, it won’t make their financial problems disappear. Nicolas Marquis, an agribusiness strategy advisor specializing in dairy, recommends three tactics to help farmers come out on top.

The farmgate milk price increase is calculated based on a number of factors that balance the needs of farmers, processors, restaurant owners, retailers, and consumers.

The 2024 increase was initially scheduled for February, but the Canadian Dairy Commission postponed it by three months due to rising grocery prices.

What does the price increase mean for farmers?

Let’s take the example of a dairy farm producing 100 kg of quota. The 1.77% farmgate milk price increase will bring in an extra $15,000 a year or so.

But let’s say that farm has an average debt of $28,000 per kg of quota ($2.8 million in total debt). If those loans are renewed in 2024 with a 4% hike in interest rates, it will cost the farm about $53,000 more a year. That’s no easy challenge.

At an April 3 gathering of agronomists in Saint-Hyacinthe, Charles Gauvin, Senior Vice President Québec and Atlantic for Farm Credit Canada (FCC), said that 60% of the FCC’s fixed-rate loans will reach maturity within the next two years. He also said there has been a 19% increase in the number of farms unable to repay their loans.

And that’s not even counting machinery, inputs, labour and other costs, which have skyrocketed since the pandemic. (Luckily, feed costs are down.)

So, how can we rise to the challenge?

1. Focus on income by making your quota

Costs can be hard to control. It’s always a balancing act to work on cutting costs without sacrificing herd health, reproduction, milk components, productivity, and all the rest.

But beyond reducing costs, it’s important to find ways to maximize your revenue. You’ll need to measure your daily feed margin—total milk pay minus deductions and feed costs. For most farms, maximizing revenue means:

• Increasing net income per stall

• Delivering your quota with as few cows as possible (to save on the cost of keeping more animals)

For some farms, the solution might involve investing more in herd management and feed. Will that raise costs? Maybe. But if your income grows faster than your costs and your daily margin goes up, you’ll be improving your situation. Look at it this way: would you turn down a pay raise because it would mean you’d pay more taxes?

2. Utilize additional production days

Every year, 20% to 25% of farms finish month after month with non-deferrable quota. And many dairy farms struggle to squeeze in additional production days.

Sometimes this happens even with high productivity, because the farm doesn’t have enough dairy cows due to lack of space.

However, other times there would be a clear advantage to increasing average production per cow, even if that meant the cost per kg would go up slightly. Because it’s not the margin per kg that determines a cow’s income. It’s the margin between the income and cost per kg, multiplied by kg delivered.

Here are some of the keys to taking advantage of additional production days:

• Enough replacement cows

• Good management

• A good transition program to maximize lactation peaks

   

3. Have a good relationship with your banker

For a dairy farmer who’s in a tough financial situation, a banker is an important ally. Your banker can help by:

• Restructuring the debt, for example by extending loan terms where possible

• Putting a partial or total moratorium on the principal, letting you pay only the interest on the debt for a specified period

Your lender is more likely to be flexible if they can see that you’re running your farm well—herd in good health, reproduction going well, lots of calvings planned, etc. In short, your banker will want to make sure that your farm is delivering its quota and continues to do so over the coming months.

“[To help farmers], we start by making sure that their business has the best financing for the assets they own and their repayment capacity,” says Sylvain Morel, Vice-President, Agriculture and Agri-Food Markets, for Desjardins Group. “We’ll often work with a multidisciplinary team—for example, another farmer, a dairy production specialist from their cooperative, a veterinarian, a management consultant, an accountant and the lender—to analyze their situation.”

In addition, we recently learned that the UPA is working on a proposal called Bouclier Financier, which would shave a full 3% off the interest rate being paid by farms in the red. We hope this proposal will be successful, as it would be a big step towards helping farms facing major financial challenges.

Combined with these three strategies, the farmgate milk price increase should help you weather the storm. Remember, your agri-advisor and all the other consultants in your farm’s network are here for you.