Dairy Advance Rate Schedule: a Worked Example

A forecast milk price says what a season's milk will be worth. It does not say when the money arrives, and for a farm that spends heavily through winter, calving and spring, the when decides the overdraft. The processor holds back part of the forecast on every kilogram until late in the season or after it, which gives it room to set the final price without asking for money back. The farmer carries that held-back money as an amount owed by the processor, and the bank funds it through the seasonal facility.

Two farms on the same forecast price can therefore need very different seasonal limits. A farm that calves early, spends early and supplies most of its milk in the months when the advance rate is lowest borrows more, for longer, than one whose milk arrives later in the season. The schedule is the processor's; the lender's job is to lay the farm's own costs and production over it.

In New Zealand the largest processor publishes its schedule as a set of percentages of the forecast, lowest for the first months of the season and rising through it, with the last instalments paid after the season ends, once the final price has been confirmed. Other processors set their own terms, and a published schedule is guidance that can change. Because each payment is a share of the current forecast, a change in the forecast flows through every instalment from then on. A rise brings a retrospective top-up on milk already supplied. A cut reduces the instalments still to come and, in an extreme case, could leave a farm owing money back.

Australia works on a different principle. Under the Dairy Code, a processor must specify a minimum price in each milk supply agreement, as a single price or a monthly or yearly schedule, and may pay more. Retrospective step-downs are prohibited, and the processor may lower the minimum for future milk without the farmer's agreement only in exceptional circumstances, on 30 days' notice. In the UK, the Fair Dealing Obligations (Milk) Regulations 2024 require a milk purchase contract to use a fixed price, a variable price determined by factors set out in the contract and reset no more often than monthly, or a combination; those pricing rules do not apply to a co-operative buying from its own members or to a price negotiated by a recognised producer organisation. In both markets the lender builds the cash flow on the price the contract fixes or the method it sets, rather than on a forecast settled long after the milk has gone.

A New Zealand dairy farm, constructed for this page like every figure on it, expects to supply 300,000 kgMS in a season that opens on a forecast of NZ$9.00 per kgMS. Its processor's schedule, simplified for the example, advances 70% of the forecast on milk supplied to December and 80% on milk supplied after that, with the balance paid after the season ends. By the end of December the farm has supplied 165,000 kgMS. Figures in NZ$:

The cut is 11% of the price and 18% of the money the farm has still to receive, because all of it falls on the instalments not yet paid. Of the NZ$300,000, NZ$108,000 comes out of the payments for the rest of the season, so the overdraft peaks higher and comes down more slowly. The other NZ$192,000 comes out of the final payment, which arrives after the season has ended and the next season's spending has started. That is the part that turns one bad season into a seasonal line still drawn when it should be at its low point. The 70% and 80% rates are the example's, not any processor's schedule.

The forecast price, and the range a processor may publish around it, tells the lender where the season might end. The schedule tells it how much of that is already in the farm's bank account and how much is a promise. Against both it reads the farm's breakeven milk price, the payout at which the season covers its costs and commitments, because a cut that leaves the forecast above breakeven is a timing problem, and one that takes it below is a loss.

At balance date the held-back money appears in the farm's accounts as an amount due from the processor. The lender reads it as a receivable from the processor, as good as that processor's own standing and payment record, and one whose size is not settled until the final price is. A balance sheet prepared on a forecast that is later cut overstates it.

DEFINED IN ONE PARAGRAPH → · WHEN THE MILK PRICE FALLS → · AGRICULTURAL LENDING →

It decides the seasonal limit. A lender sizing a dairy overdraft builds the month-by-month curve from the farm's budgeted costs and its production profile, multiplied through the schedule, and sets the limit at the peak with room for a cut. A limit sized on the annual figures alone misses the months when the farm has spent most of its money and received the least.

It decides how a mid-season cut is handled. The first sign is the overdraft running above the budgeted curve, and the conversation the lender wants is the revised budget at the new price, run through the same schedule, showing the new peak and when the line will reach its low point. And it decides what changes when the schedule does. A processor that raises its opening rates moves cash earlier into every supplier's season, and a lender's seasonal limits can come down with it.