Gerard Murphy, from GDM Agricultural Consulting, warned there were many vagaries between processor contracts that require a deep analysis.
“It’s important to understand if you calculate your input costs based on litres, but the contracts you’re being offered are based on milk solids (MS),” he said.
“It’s also important to understand if the prices quoted in your contract are ex-GST or inclusive of GST. This varies between processors.
“And some processors quote prices that don’t include deducting levies, while others do deduct levies, or some levies, before offering their final price.”
Mr Murphy recommended getting independent advice about processors’ contracts from your lawyer and accountant.
“This is about managing risk. Don’t compare your business to your neighbours or other family members. That’s comparing apples and oranges,” he said.
“You need to do an evaluation on your figures and your farm’s production only.”
He said a good risk management tool was to look at milk supply based on the farm’s production curve, not full production.
“Locking in the price for a portion of milk production allows flexibility when it comes to making decisions around supply. These decisions are about risk mitigation.
“If you have a spring-calving herd, you might be working to have 80 per cent of milk production by the end of January.
“As well as calving pattern, other variations that impact on how that’s achieved include pasture and feed supplies.
“Lower milk production results from low water allocations, drought, lack of timely rainfall, and deciding to dry-off during late summer rather than autumn.
“You might make decisions about cutting back on the amount of feed that’s available and this affects whether the herd continues to milk at peak production for the rest of the season.
“When you calculate the milk price you need to achieve, you also need to look at other costs of production — including the cost of labour to produce grass, the cost of feed, fertiliser, depreciation and changes in inventory.
“A break-even milk price is to be cash neutral after all production, living, debt and capital costs.”
Mr Murphy said another risk mitigation tool was to forward contract input costs in good seasons, to offset against poor weather conditions or a declining milk price.
