Milk price rise welcome, but times still tough for BOP dairy farmers

By David Porter, Business Writer

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Te Puke Dairy farmer, Steve Bailey, talks about the improvement in Fonterras profit.
Te Puke Dairy farmer, Steve Bailey, talks about the improvement in Fonterras profit.

Bay of Plenty's dairy farmers have welcomed the profit rise and increased forecast milk payout announced by Fonterra this week.

But the sector remains hard-pressed after several years of low returns, said Steve Bailey, Federated Farmers Bay of Plenty dairy chairman.

And as one farmer noted, past milk price volatility meant there were no guarantees Fonterra's latest forecasts would be met.

Fonterra announced a 65 per cent gain in full-year profit to July 31, 2016 of $834m, up from $506m a year earlier. Sales fell 9 per cent to $17.2b. The cost of goods sold - primarily NZ-sourced cost of milk, which fell about 13 per cent to $13.6b - and cost cutting, made up for a decline in sales.

But in good news for beleaguered dairy farmers, Fonterra this week also raised its forecast payout for the current season by 50c/kgMS to $5.25/kgMS, for a total forecast payout available to farmers in the 2016/17 season of $5.75 to $5.85, including forecast earnings of 50-60c.

"Absolutely it's starting to head in the right direction and it's a big lift over where we were last year," said Mr Bailey.

"The farm gate price is up. It's been a few years since we were even in the low $5, so to be talking of $5.25 at this time is a positive thing. But over the long haul, we're still way down on where we have been in other years."

But although Mr Bailey said he expected this would see more dairy farmers get into the black, there would still be some who were not covering the cost of production, and sharemilkers especially were finding it very hard.

He added that he had spoken to a lot of farmers this year, and that most were down in production. "I haven't heard of too many dairy farmers whose production is up. So obviously, if your production is down, your income will be down as well."

ANZ rural economist Con Williams told the Bay of Plenty Times the improvement in international prices was looking more durable than in the past two years.

"I think that bodes well. There's no doubt it's positive and will help sentiment. And that is feeding through to things like the milk price improvement. That will help the financial stress currently in the sector. Cash flow now looks to be getting pretty much back to break-even for the average owner-operated dairy farm."

But the improvement had also been associated with cost cutting and productivity improvements to lower cost bases as well, he said, which was impacting the farm services industry. (see story below)

Fonterra chairman John Wilson described the 2015/16 season as incredibly difficult for farmers, their families and rural communities.

"Global milk prices remain at unrealistically low levels, but as the signs in the market improve, we are very strongly positioned to build on a good result in the year to come," he said.

Fonterra Shareholders' Council chairman Duncan Coull said the lift in the milk price would provide some relief to farmers.

Tauranga dairy farmer David Jensen said Fonterra's profit was great, but not unexpected given its input costs of milk had been very low.

"But for farmers and especially for sharemilkers, it's all about milk prices. And while Fonterra has limited influence over the price, that is the bit that matters. It is absolutely still very tough."

And while Fonterra was talking about an increase in the forecast - "we haven't got it yet", he said. "We only have to think back to this time last year and they were lifting the forecast and it often collapsed on us. So I think there's a degree of acceptance amongst the farmer base that this thing's going to go up and down. It's become hugely volatile and that's hard to manage."

Rotorua and Mamaku dairy farmer Lachlan Mckenzie said any lift in milk prices was good news for farmers.

"As far as Fonterra's financial results . . . if they pay less for the price of milk they can make a higher profit. And so you have to look at it in the overall context. There are some aspects of the company that are improving. But there are still areas there that they have work to do on."

[SIDEBAR]

ANZ rural economist Con Williams says that from a regional perspective, the dairy slump has had a flow-on effect to people who provide services or products to dairy farmers , especially the more expensive discretionary items.

"It's been felt more strongly since the end of last year through to now," he said.

"That's just because the cash flow constraints on farming operations increased substantially through that period and that saw farmers really look at their budgets quite closely. I don't think that focus will change until there's little bit more certainty around that milk fat forecast, relieving the pressure farmers are feeling."

NZ Federated Farmers dairy chairman Steve Bailey confirmed the impact was being felt on everyone involved in supplying the farm sector, down to people who graze young stock and supply feed.

"People are just trying to stay in business and make it work," he said.

A major concern was that the farm sector depended on strong relationships to work successfully. And now some relationships were being broken, because farmers could no longer afford to buy some services.

Tauranga farmer David Jensen added that it was tough on dairy farmers because there was not much cash around.

"It's tough on the farm because people aren't very confident about where the price will end up. And that's true for on the farm, but also for the farm support business."

Bay of Plenty Dairy Stats 2014/15 *

The BOP has 8% of NZ dairy herds, 7% of dairy cows, and 7% of total dairy land. In other data, the BOP has:
• $599 million value of milk production to economy
• 3158 people employed in the dairy industry
• 927 herds
• 345,588 milking cows
• 652 farm owners/operators
*Source: Dairy NZ (most recent available data)

- Rotorua Daily Post

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