We are now seeing Fixed Milk Price Contracts with Fonterra appearing in annual accounts. As such, it is timely to set out how these work from a cashflow and tax point of view.
Fixed Milk Price Contracts are offered by Fonterra monthly from March through to December. Contracts taken from March onwards relate to the following season (ie a contract in March 2020 relates to the 2020/21 season).
From a cashflow point of view, Fixed Milk Price Contracts are paid in line with the standard advance rate schedule with the following adjustments:
- If the Fixed Milk Price Contract is above the farmgate milk price, a top up payment is made with the final deferred payment for the year (late September/early October)
- If the Fixed Milk Price Contract is below the farmgate milk price, payments will stop once the fixed milk price has been reached
- A service fee of 10 cents is deducted in two instalments of 5 cents in each of January (paid February) and February (paid March)
The capacity adjustment and all other fees remain unchanged. For more detailed commentary on how the payments work, please refer to the Fonterra booklet linked here.
From an income tax point of view, as the milk income under a Fixed Milk Price Contract is guaranteed, all of the deferred milk payments received after balance date need to be brought back into the annual accounts as taxable income even though it has not yet been received. For example, the deferred payments received from July to September 2021 related to Fixed Milk Price Contracts need to be included in the 2020/21 tax accounts.
We are now actively asking clients if they have any Fixed Milk Price Contracts and requesting the details of any contracts including the contract rates and fixed kgs. If you know that you have Fixed Milk Price Contracts in place, please feel welcome to forward this information through to your client manager at your earliest convenience.
If you have any queries regarding the cashflow or tax treatment of Fixed Milk Price Contracts, please do not hesitate to contact us to discuss further.