It is estimated that farmers will need on average $150K or more to pay the bills this season.
It is estimated that farmers will need on average $150K or more to pay the bills this season.
Dairy farmers are being cautioned about spending but urged to weather the storm, writes Glenys Christian.
As dairy prices continue to fall, farmers are likely to receive $4.75/kg milk solids this year, says DairyNZ chief economist, Matthew Newman.
This is based on retrospective payments from 2014-15 and advance rates for the current season, and includes an estimated dividend for Fonterra shareholders.
It means dairy farmers are forecast to receive around $1.75/kg less milk income than in an average year -- their lowest earnings since 2006/07.
Taking into account New Zealand's milk production of 19 million tonnes, the latest forecast represents a $3.3 billion drop in milk revenue.
Newman says the lower on-farm spending and reduced tax payments maybe equivalent to about 20 cents of farm working expenditure or a total of $0.4 billion. Added to this is likely to be lower capital spending of about 80 cents, totalling $1.5 billion. Tax intakes would be down about $0.3 billion and personal spending or drawings would fall $0.2 billion.
The national economy would be drained of a total of $2.4 billion, affecting all New Zealanders.
Newman says the farmers most at risk are those who have recently invested in land or infrastructure, those new to the industry, sharemilkers, and those with high debt levels and farm working expenses.
The break-even milk price for the average farmer is estimated to be $5.70/kg milk solids, so about $1/kg will be required from off-farm income or increased overdrafts.
"The big issue for farmers is managing their cash flows through the season," says Newman.
"These drop quickly throughout winter and generally stabilise at negative levels for the rest of the season.
"This will mean the impacts of the low milk prices in 2014/15 and 2015/16 will be felt for a couple seasons as farmers will be required to repay the additional borrowings."
Newman estimates they will need on average $150,000 or more to pay the bills this season.
Banks are being realistic in wanting farmers to come to them with re-done budgets and additional lending requirements, he says.
And though the present situation is grim, it will allow dairy farmers to determine what's important and to focus on efficiencies, making them more competitive in the long term.
Mathhew Newman, Dairy NZ chief economist.
The big issue for farmers is managing their cash flows through the season.
It's deja vu for the farmers. This time last year they were told international milk prices should recover by the end of 2014 or early the next year at the latest. It's the same line a year later. The big difference is that last year Fonterra's opening forecast payout was a comfortable $7/kg milk solids. That's dropped to $4.40/kg over recent months, and, worse still, the opening forecast for 2015/16 is just $5.25/kg.
Industry body DairyNZ, to which all New Zealand dairy farmers pay levies, puts some cold, hard facts around that, calculating that the average milk price over the last six years was about $6.50/kg. The record 2013-14 payout was $7.69/kg milk solids.
With the wholemilk powder price down 10.8 per cent at the most recent Fonterra fortnightly GlobalDairyTrade auction, farmers are fearful of another unwelcome repeat -- price cuts as the season progresses.
They are asking why their co-op seems stuck in a commodity cycle when it's 3Vs (volume, value and velocity) strategy has been all about moving up the value chain.
Fonterra chairman John Wilson has told farmers that predicting global dairy prices in a year when there are six or seven different factors at play is harder than ever. He's urging farmers to weather the storm, but acknowledges this month in particular will be very hard for them as retrospective payments from last season finish.
Times have changed, both at home and internationally. In 2013-14, dairying accounted for a third of the total value of merchandise exports from New Zealand, largely driven by Chinese demand which has almost quadrupled since 2000.
Its dairy imports now account for 17 per cent of those worldwide, with New Zealand having the largest share of the wholemilk powder market. But China's economy is slowing while competition grows. More recent political upheaval, particularly in Europe, makes other buyers even more nervous.
DairyNZ has cautioned farmers about on-farm spending such as adding wintering barns or feed pads to boost milk production.
In 2001, 70 per cent of dairy farmers were running low input systems, based mainly of feeding grass to their herds. Just 17 per cent were classified as medium input and 13 per cent high input, including feeding supplements such as palm kernel, grain and maize silage. Now just 30 per cent of dairy farmers are low input, almost matched by 29 per cent in the high input category and 41 per cent in the middle.
In the commodity business, the New Zealand dairy industry is still largely cost-competitive. But the United States' most profitable farms, such as large feedlot operations in California, are closing in as New Zealand farmers have paid high prices for land and locked in high farm working expenses to achieve more milk production.
Their challenge now is to operate a relatively low cost, resilient business while dealing with ever-increasing environmental issues. And that's never been more difficult than in a year like this one.
Glenys Christian is the editor at large of the New Zealand Dairy Exporter magazine.
