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Current as of 30/09/16 07:39PM NZST
Jamie Gray is a business reporter for the NZ Herald

Farmers dig in as low price blues roll on

Charlie McCaig, with his family (from left) Miles, Jody and Finley, says most farmers know it's a long game.
Charlie McCaig, with his family (from left) Miles, Jody and Finley, says most farmers know it's a long game.

'We are grinning and bearing it." That's how Taranaki sharemilker Charlie McCaig describes how he and his wife Jody are faring with a milk price that sits $1.35 a kg below the average cost of production.

McCaig, who quit his job as an office worker in England's Midlands to follow his then girlfriend back to New Zealand in 2009, tried his hand at farming when prices were high.

Now, the McCaigs and thousands of others face the real likelihood of two successive years of negative returns - a trend that may well continue through to 2016/17 and beyond.

Like several farmers spoken to by the Herald since Fonterra dropped the farmgate milk price to $3.90 a kg of milksolids on March 8, he is pragmatic about what needs to be done.

"It's been grinding on for the best part of two years now and so from my perspective, we have driven pretty much all of the costs out of our business that we can," McCaig says.

"It's a matter of having faith that we are in a cyclical commodities industry that will survive and that we will get through it.

"Our focus is on being here when the commodity comes back up on the other side."

McCaig and his wife won the New Zealand Sharemilkers of the Year Award in 2014. McCaig is a 50/50 sharemilker - which means he owns the herd and covers the costs relating to the herd - while the farm owner covers farm costs.

For many analysts, Fonterra's view looks like wishful thinking. Photo / Getty Images
For many analysts, Fonterra's view looks like wishful thinking. Photo / Getty Images

Herd-owning sharemilkers have seen the value of their cows drop sharply from around $2200 per animal when prices were firm to around $1700 these days.

For McCaig the drop in cow values has not affected him too badly but many herd-owning sharemilkers are facing not just cash-flow pressures but security pressure from banks.

There are those who would have borrowed with what would have been a respectable 50 per cent deposit for their herds. Now that cow prices have slumped, bank security is an issue.

"Around Taranaki, we have not heard of anyone being sold up, but certainly there are people being leaned on," McCaig says.

It's a matter of having faith that we are in a cyclical commodities industry that will survive and that we will get through it.
Charlie McCaig

"In these situations, the bankers are looking to bring extra security to those arrangements where there is increased risk," he says.

For sharemilkers at the more vulnerable end of the sector, the fall in cow prices was the "cruellest twist".

"We just need long-term views to be taken by the banks."

McCaig is a low-cost producer. On Dairy NZ's scale of one to five, he is a low-cost system-two farmer - he buys in a little palm kernel and grazes young stock off the farm.

"Being in that quartile puts you in good stead to make it through situations," he says.

Lloyd Downing, who has been farming near Morrinsville since he was 16, says retirement is looking a more distant prospect thanks to the low milk price.

"It's not good but we've been here before," Downing says.

"The last time the payout was like this ... was in 1991 but we had 15 per cent interest rates back then," he says.

If you are too highly geared and you are paying high rent, then you are going to go broke - we are no different to any other business.
Lloyd Downing

"It's going to be pretty tough - $3.90 is not sustainable but it would be a lot worse if interest rates went through the roof."

Downing says he has heard of some bank-inspired farm sales but like many others spoken to by the Herald, he is matter-of-fact about the risks.

Like any other business, he says, if the debt is high and the inputs are high, then there are going to be problems.

"If you are too highly geared and you are paying high rent, then you are going to go broke - we are no different to any other business."

Downing has 500 cows on 214ha. He occasionally buys in feed. He recently increased the size of his farm but his per hectare stocking rate has dropped.

Farmers are rapidly applying the brakes to their costs.

Bill Guest, operations director of Whangarei-based Farmers of NZ, says that of the organisation's 1000 or so members about 25 had lost properties.

"Some of them have been multiple owners with three or so properties - after the banks did a big cull there last year," Guest says.

He says banks have been "overzealous" with their lending to farmers, who were now struggling to pay their rates. "Basically at $3.90 [a kg of milksolids] this is going to put 85 per cent of dairy farmers at risk," he says. "There are going to be some cheap properties on the market."

International dairy prices have been depressed for the past two years, mostly through overproduction from Europe, low demand and Russia's ban on the importation of dairy products from the West in tit-for-tat sanctions following its annexation of Crimea in 2014.

John Wilson. Photo / Alan Gibson
John Wilson. Photo / Alan Gibson

Recent EU moves to support prices will hurt the industry globally because they will delay the signals to farmers to essentially produce less milk, he says.

Fonterra itself is less gloomy.

Fonterra chairman John Wilson says he is optimistic that global dairy prices will start to pick up in the second half of this year and the sector move more into balance.

For many analysts, Fonterra's view looks like wishful thinking.

But Charlie McCaig, the young man from the Midlands, is under no illusions.

"You can't farm for a quick buck," he says.

"Everyone is going through tight times and it is not fun to see that, but there is a group of people who are working their way through the ranks of dairy farming who know it is a long-term game and who will be there when things come right.

"I don't think you find too many fair-weather farmers."

Cull dairy cows flooding the market

While many farmers are putting on a brave face as they consider the prospect of three, or possibly four, years in a row of negative returns, AgriHQ analyst Susan Kilsby says she expects to see increased cow culling.

"We are certainly seeing cull cows flooding to the market at the moment -- driven mostly by the dairy cow kill," Kilsby says.

The national herd is now down by about 5 per cent and is still declining. Kilsby expects numbers to be down by 10 per cent by the end of the year.

But that will not translate into a 10 per cent fall in production, as only the poorest producers are sent off to the works, leaving higher-performing cows to pick up the slack.

"It's all about producing at the lowest possible cost," Kilsby says. "The lessons out of there are that people will understand much better what costs they can take out without affecting the bottom line," she says.

"I don't even know if it is properly understood in the industry, but I would say that we are definitely in for another season of low prices ahead and it could even spill into a fourth season while this rebalancing occurs in the European market."

- NZ Herald

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