Risks faced by sharemilkers after the full implementation of the new payment system

Abstract

This work analyses the risks faced by sharemilkers, from a financial point of view, after the full implementation of the new payment system. The study explores the main financial constraints that these kinds of dairy farmers will face under the different payment system, investigates their risk of bankruptcy, and analyses the main features of the successful dairy farms.

The research simulated financial performance of representative farms defined through their whole farm budgets and their balance sheets. The variables considered were milksolids price and dairy cows price. A probabilistic distribution of milksolids price was gathered through a survey of experts. Using the Delphi technique, dairy cows price variations were generated through an econometric model that relates the prices of milksolids and dairy cows.

The research found that the model with less than 200 milking cows and the one with more than 400 milking cows present high probabilities of strong financial risks if only milksolids income is split. And the model with 200 to 400 milking cows can only survive under that situation if the prices per kilo of milksolids range from NZ$ 3.62 to 4.17. The main risks faced by sharemilkers are the small or negative final cash results, the small or non-existent credit reserve and the possibility of not being able to repay principal on loans. The model with more than 400 milking cows is all the time without credit reserves.

The situations where the three models perform successfully or with only moderate level of financial risks have some features in common: the GFI/SU is greater than $103 the GFI/ha is greater than $2.006, and the EFS/ha is greater than $906. The Cash surplus/ha should not be lower than $-76. Finally the Returns on Assets are higher than 14%, while the Returns on Equity are larger than 17%.

The situations where the models perform successfully in general are more efficient (in terms of income per unit of asset) that those that become bankrupt. The possibility of bankruptcy is positively related with the initial level of indebtedness and negatively related with efficiency.