Dairy farms more affordable
Low short-term interest rates for someone buying in the current market make the affordability of servicing debt on a dairy farm relatively good despite the lower payout, according to a Dairy Farm Affordability Index created by Peter Barnett of Bayleys’ Feilding office.
The index measures how many kilograms of milksolids it will take at the prevailing payout to service a $1,000,000 loan at prevailing interest rates. Interest rates are calculated from the 90-day bank bill rate at the time plus a margin of 1.75%.
Barnett cites the example of an existing dairy farmer considering purchasing a support block. To justify this decision, the farmer wants to know how much more milk he will need to produce on the main dairy farm to service the extra debt incurred to purchase the run-off.
If the run-off costs $1,000,000, the owner would have had to produce an additional 13,500kgms last year (at $5.20/kgms) from the home farm to cover the interest cost of a $1,000,000 loan. The previous season would have actually required even more kilos of production, despite the $7.90/kg payout, due to much higher interest rates at that time, averaging around 10.5%.
Looking forward, using a $4.55/kg payout and an average 90-day bill rate of 3.25% for the current season,
only an additional 10,440kgms would need to be produced to cover the interest cost – effectively making the purchase of the run-off more affordable this year.
While this example does not take into account relative farm costs, Peter Barnett says anecdotal feedback from dairy farmers suggests many have reduced farm working costs by around $1/kgms when compared with the 07/08 year. He also says it does not take into account the fall in property values which means purchasers are able to buy at a significantly cheaper per hectare cost than was the case two years ago.
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