Farmers face hard season - DairyNZ

Dairy farm bank balances will be heading into the red this winter and spring. Photo / NZME.

Farmers told they’ll need resilience as low milk payouts tipped to extend into 2016.

Dairy farm bank balances will be heading into the red this winter and spring, producing some short-term but significant cashflow management challenges for farmers, says DairyNZ.

Tim Mackle, chief executive of the farmer-funded industry body, says 2015-16 will still probably end up being a break-even year for most farmers, but cashflow will be a major issue that could result in some increased term debt in the sector and less spending in the regions.

Fonterra's farmgate milk price forecast for the current season stands at $4.70 per kg of milksolids and ongoing weakness in the past three GlobalDairyTrade auctions has forced some economists to revise down their milk price forecasts for 2015/16. Last season, the Fonterra payout was a record $8.50 per kg.

DairyNZ estimates $5.40 per kg - farm expenses plus debt servicing costs - to be the average break-even point for farmers.

Farmers typically go deeper into the red during the peak producing months of September, October and November because they are still getting an advance payout on their milk - not the final price - at a time when costs are ramping up.

"We have seen a level of apathy up the last four or five weeks from some farmers because we had a couple of good GDT rises in February," Mackle said. "Now that prices have come back, it's proved to be a bit of a false dawn, so I think that it's really hit home that farmers need to hunker down a bit more.

"We are trying to raise awareness that we need to now be focusing on cash flow and putting plans in place to be resilient through this next period." He said farmers were used to having seasonal cashflow that drops into the red but then comes back into the black at some stage during the summer period.

"However, our current forecasts indicate that many farmers won't be in credit for the entire 12 months of next season unless costs are reduced, income is higher than predicted or some of their overdraft is put into their term debt."

A series of nationwide farmer events in DairyNZ's "Tactics for Tight Times" campaign begins this week.

Mackle said DairyNZ aimed to help farmers understand how low their cashflows might go for 2015-16 and how long they might stay there.

"We've analysed what it's like for the average farmer in every dairying region and plotted that on a graph. It's not looking pretty," he said.

Mackle said while the long-term prospects for the industry were still positive, farmers had to stay competitive in a global exporting business where NZ's market share could be eroded by other competitors.

"We're in a strong position as an industry because we have scale and strength as a competitive producer and exporter of high-quality dairy products," he said.

"There's still growing demand for our product and the supply-demand equation will eventually improve.

"But the landscape internationally is also changing, with EU quotas coming off and the US steadily gearing up to produce more milk, potentially for export."

Mackle said resilience was needed so farmers could cope effectively with the trough in milk prices after the record payout of 2013/14.