Debt per kgMS: a Worked Example

A dairy farm's income is a volume times a price, and in New Zealand both are expressed in kilograms of milksolids. Costs are commonly budgeted the same way. Stating debt in that unit too makes the whole farm readable in one column: what a kilogram earns, what it costs to make, and what it has to carry to the bank.

It also removes farm size. A debt of NZ$12m says little until it is known whether the farm milks 300 cows or 1,500. Per kilogram, the two can be compared, and a farm can be compared with its own history as debt is repaid or production changes. The agricultural lending guide reads the measure on a succession file; this page shows how it moves when a farm expands.

Two definitions need settling before any comparison. The first is which debt. Survey figures are often closing term liabilities, while a bank's own reading may add the seasonal overdraft, at its peak or its balance date, and any vendor or family finance; the farm owes all of it. The second is which production. A single season can be flattered by good grass or hurt by drought, so a lender may use an average of recent seasons, or a normal season for a farm that has just changed.

The second line is why the measure is so readable: one percentage point on the interest rate costs one hundredth of the debt per kilogram. The measure belongs to New Zealand, where milk is paid on milksolids. Australian farm surveys quote prices per kg MS and in cents per litre, so it translates. In Britain milk is usually priced in pence per litre, and a lender there would make the same reading on that basis.

A dairy farm in New Zealand, constructed for this page like every figure in it, produces 380,000 kgMS and owes NZ$7.6m at 6.5%. Figures are in NZ$ because the milk price is. It proposes to buy the neighbouring block for NZ$4.75m, all borrowed, adding 95,000 kgMS. Working expenses stay at NZ$5.90 per kgMS. Drawings stay at NZ$190,000. Principal rises in line with production, and other income is left out to keep the example simple.

The new block is NZ$50 of debt on every kilogram it adds, two and a half times the farm's existing load, so the average climbs by six dollars. The breakeven rises by 29 cents, and it rises less than interest does only because the drawings are spread over more milk. At a NZ$7.50 milk price, the season's shortfall goes from NZ$342,000 to NZ$565,250. The farm has become larger and easier to tip over, though it may also be the better farm once the debt is repaid. These levels belong to the example and are not a market norm.

Loan to value and debt to assets ask what a sale would bring. Debt per kgMS asks what the milk has to carry. The two can move in opposite directions. Suppose the farm's assets are NZ$19.0m before the purchase and NZ$23.75m after it: debt to assets moves from 40% to 52%. If land values then fall 15%, assets are NZ$20.19m and debt to assets is 61%, while debt per kgMS stays at NZ$26.00. Nothing in the second reading changed, because the debt and the production did not.

Neither is enough alone. A farm with moderate debt to assets can still fail to service its debt in a low-price season, and a farm with a heavy load per kilogram may have the land to refinance. The breakeven milk price is the bridge between them, since it turns the load into the price the farm needs.

DEFINED IN ONE PARAGRAPH → · THE BREAKEVEN MILK PRICE → · DAIRY COST OF PRODUCTION →

The figure is most often argued over a purchase or a conversion, where new debt is added at a higher cost per kilogram than the farm's average and the production assumption is itself the forecast. A lender asks how soon the added kilograms will arrive, whether the block's output is proven or budgeted, and what the debt per kgMS looks like if it comes in short. Production that arrives two seasons late means two seasons at a load the budget did not show.

It also frames repayment. A repayment target stated per kilogram is one the whole family can read, and a lender can test it against milk price scenarios. The advance rate schedule shows how that price arrives through the season. Where a farm's expansion leaves little room, the conversation about principal, term and drawings happens before the purchase rather than in the first low-payout year.

AGRICULTURAL LENDING → · ISSUE 03 · KAURI DAIRY →